Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Capital Senior Living Corporation (NYSE:CSU)

F2Q08 Earnings Call

August 6, 2008 11:00 am ET

Executives

James A. Stroud – Chairman of the Board

Lawrence A. Cohen – Vice Chairman of the Board & Chief Executive Officer

Ralph A. Beattie – Chief Financial Officer & Executive Vice President

Analysts

Frank Morgan – Jefferies & Company

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Todd Cohen – MTC Advisors

James A. Stroud

Good morning and welcome to Capital Senior Living’s second quarter 2008 earnings call. On May 29, 2008, the company announced that a special committee of our board of directors had engaged Bank of America Securities as our financial advisor to assist the company in exploring and considering a range of strategic alternatives. The company is still evaluating its strategic alternatives and at the appropriate time we will advise the marketplace where the company stands in the process. During this time period the company intends on executing its 2008 business plan regarding development of new communities, expansion and conversion of existing communities and emphasizing organic growth. Also at this time, the company will not start up or acquire home healthcare. Home healthcare companies currently trade at a premium to value and any startup or acquisition by the company would take several years to create meaningful value. We will leave in place existing third party home healthcare providers that can terminated on short term notice.

We are excited about the new Ohio Waterford development in Dayton, Richmond Heights and Toledo. Each project has approximately 100 independent living units and 45 assisted living units to permit cost effective aging in place. Capital’s competitive design and build process creates a quality living environment at an average cost per unit of $150,000. Scheduled openings are third quarter 2008 for Dayton, second quarter 2009 for Richmond Heights and Toledo. The company is also pursuing expansion opportunities for 220 units in Forth Worth Texas, Fort Wayne Indiana and Columbia South Carolina as well as conversions of independent living units to assisted living or memory care on five communities. The conversion of 16 independent living units to AL in Lincoln Nebraska was completed in the second quarter 2008. These actions will create additional value in our portfolio despite the ongoing challenging environment.

This environment in the second quarter, we still achieved a number of positive year-over-year results with revenue increasing 5%, EBTIDA growth of 7% and the EBITDA margin improving 60 basis points. Now, for further comments on the second quarter, I introduce Larry Cohen, Chief Executive Officer.

Lawrence A. Cohen

I’m pleased to welcome everybody to Capital Senior Living’s second quarter 2008 earnings release conference call. Despite a challenging economy and housing market, second quarter revenues, EBITDA and net income all increased with strong margins as we implemented rent increases and employed sound expense management. We have increased our efforts in marketing our communities as an affordable option delivering exceptional to elder seniors in challenging economic times. New advertising and direct mail campaigns compliment additional telemarketing, increased events and outreach. These efforts increased our leads generated during the quarter with a higher conversion rate of tours to deposits.

Move ins in the second quarter matched those of the second quarter of 2007 however, move outs increased as a result of higher attrition caused primarily by deaths and higher levels of care. Our attrition rate for the second quarter was 40.7% compared to 38.5% in the first quarter. Independent living attrition was 36.2% for the quarter compared to 35.2% in the first quarter and assisted living attrition was 58.2% versus 51.2% in the first quarter. Attrition has slowed in the third quarter and hopefully will moderate for the balance of the year.

Weekly occupancies have improved every week in July and appear to be improving in August. Our disciplined approach to managing expenses and increasing rates is generating attractive growth in net operating income per unit and operating margins. Average monthly rent in June of 2008 increased 5.8% from June 2007 and 1.1% from March of 2008. June 2008 net operating income per unit grew 8.8% from June 2007 and 3.8% from March 2008. These achievements resulted in solid community operating results for the second quarter of 2008.

During the quarter 61of our communities were stabilized with an 87.2% average physical occupancy rate. Excluding four communities with units being converted to higher levels of care, the average physical occupancy rate was 89%. Operating margins before property taxes, insurance and management fees improved to 48.7% in our stabilized independent and assisted living communities. At communities under management these include our consolidated communities, communities owned in joint ventures and communities owned by third parties and managed by the company, same store revenues increased 2.3% versus the second quarter of 2007 as a result of a 5% increase in average monthly rent. Our expense management and group purchasing program limited same store expense growth to 2.6% resulting in same store net income growth of 1.9% from the comparable period in 2007.

The number of communities we consolidated in the second quarter increased to 50 from 49 a year earlier. Financial occupancies of these communities averaged 86% during the quarter. Excluding the four communities with planned conversions, the average financial occupancy for the quarter before these six consolidated communities was 88.1%, a 100 basis point improvement from first quarter financial occupancy for these 46 communities. Operating margins at our 50 consolidated communities were 45% during the quarter and average monthly rents were $2,456, a 5% increase from second quarter 2007 average monthly rates and a 1.7% sequential increase from first quarter average monthly rents.

17 of our consolidated properties are Waterford Wellington communities which we developed and opened during 1999 and 2002. In the second quarter 2007 these communities had an 89.3% financial occupancy compared to 91.8% in second quarter 2007 and average monthly rents grew 4.2% and 1% sequentially from first quarter 2008 to $2,054. Operating margins also improved at the Waterford Wellingtons to 45% from 43% a year ago. Occupancies improved in July and we are encouraged that pent up demand by an ageing and needy population with very limited new supply of senior living communities will return our occupancies in the future to historic levels of 90% to 93%. Every 1% gain in occupancy at our consolidated communities would generate approximately $2 million in additional revenues. A 5% increase in average monthly rents at our consolidated communities would generate approximately $8.5 million in additional annual consolidated revenues over annualized June 2008 revenues.

As stabilization, we typically achieve an 80% incremental EBITDA margin which would significantly increase the company’s EBITDA. We have received numerous inquiries about the effects of food, utilities and labor cost on our operations. Utilization of our group purchasing program, managing our variable costs, particularly wait staff and housekeeping and fixed utilities contracts at many of our communities have kept our operating expenses under control. As a percent of operating expenses, labor represents 54% of operating costs, food represents 11% and utilities represent 9% of costs. Compared to the same period in 2007, second quarter labor cost increased 3%, food costs remained flat and utilities increased 4%.

The average age of our resident is 85 and the decision to move in to a senior living facility both independent living and assisted living is need driven. Residents typically move from their former residences due to health problems, difficulty in maintaining a home, loneliness or the need for supportive services. Through assisted living, our home healthcare residing in our independent living communities, residents can receive these services at all of our communities and the cost of living at one of our communities is usually more affordable than living at home. This is even more compelling today as many seniors living at home on fixed incomes are facing increasing costs for fuel and food and are seeking value. While we have seen the effects of the housing market impact certain of our markets, our move ins, deposits, tours and leads generated continue to be solid as we execute on the fundamentals, have the right people in place with the right focus and tools.

In the few communities that have been impacted by the housing market, we continue to manage our operating expenses to occupancies through managing our staffing and food costs and maintaining good margins. Our 2008 business plan is focused on increasing capacity and levels of care to meet the needs of our residents with an average age of 85 through expansions, conversions and new developments. These investments are expected to produce excellent returns on invested capital and build shareholder value.

We plan to add additional levels of care at 11 communities. We are converting 261 independent units in eight communities to assisted living and dementia care. Of these 80 were converted in 2007, 18 units were converted in May, 98 units are expected to be licensed as assisted living in the next two quarters and 65 units are expected to be licensed as assisted living in the first half of 2009. The estimated cost for these conversions is approximately $2 million and upon reaching stabilization these converted units are expected to increase our revenues by approximately $4.5 million with a 50% incremental margin. We are also planning on expanding three communities. These expansions will add 220 units for a total cost of approximately $30 million which is expected to be funded by the existing owner with respect to one lease community, supplemental mortgage financing and cash on hand. Upon stabilization these additional units are expected to increase consolidated revenues by approximately $8.5 million with a 45% incremental margin.

We have had excellent results in generating significant improvements at communities that have been expanded or have had units converted to additional levels of care. Adding additional levels of care at existing properties should enhance revenues and cash flows by improving occupancies, reducing attrition, increasing average monthly rates and expanding margins. As Jim mentioned, we currently have three communities under development in joint venture with Prudential Real Estate Investors acting on behalf of institutional investors. These developments will add 434 units of which 299 will be independent living and 135 will be assisted living units and the fist community in Dayton Ohio is scheduled to open on August 17th. We are pleased with the pre-opening deposits and very positive feedback the community is receiving in the market. The other two developments are expected to open around April of 2009. We are actively working on additional sites and strong barrier to entry markets for a limited number of additional joint venture developments.

New developments of senior’s housing continues to be severely constrained with new supply having grown at a compounded annual growth rate of only 1.3% since 1999. We continue to annualize the construction that is reported by the National Investment Center for the 100 largest metropolitan [inaudible] areas. According to the first quarter 2008 NIC map construction report, there are only three new developments in the zip codes in which we operate. This confirms our own research that construction is negligible in our markets and we expect building will continue to be rare as a scarcity of well located sites, high construction costs, complexities with zoning and limited sources of capital continue to restrict new construction. This is exacerbated by the limited number of markets that can afford the higher rents necessary to generate an adequate return on significantly higher development costs. And, the current credit crisis has further constrained development for an extended period of time providing an environment where fundamentals for the senior housing industry should lead it back out of the current trough to a robust period.

I would now like to introduce Ralph Beattie our Chief Financial Officer to review the company’s financial results for the second quarter of 2008.

Ralph A. Beattie

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’m going to review and expand upon highlights of our financial results for the second quarter and first six months of 2008. If you need a copy of our press release, it has been posted on our corporate website at www.CapitalSenior.com.

The company reported revenue of $49 million for the second quarter of 2008 compared to revenue of $46.9 million for the second quarter 2007, an increase of $2.1 million or 5%. The number of communities we consolidated on our income statement increased by one since the second quarter of last year from 49 to 50 with the addition of the Whitley Place Community which was leased on January 31, 2008. Financial occupancy at the consolidated portfolio averaged 86% for the quarter with an average monthly rent of $2,456 per occupied unit. Excluding four communities with units being converted to higher levels of care, financial occupancy of the consolidated portfolio was 88.1%. Average physical occupancy for the 61 stabilized communities was 87%. Excluding these same four communities with units being converted to higher level of care, the average physical occupancy rate was 89%. Until these four communities with conversions again reach stabilized occupancy we will exclude them from reporting our stabilized totals in future quarters.

We reported $1.7 million of development and pre-marketing fees in the second quarter of 2008 due to the three communities being developed in joint ventures. Revenues under management increased approximately 1% to $55.1 million in the second quarter of 2008 from $54.3 million in the second quarter of 2007. There were 64 communities under management in both periods. At these communities under management, same store revenue increased 2.3% versus the second quarter of 2007 as a result of a 5% increase in average monthly rent. Operating expenses increased by $.7 million or 3% in the second quarter of 2007. As a percentage of healthcare revenues, operating expenses were 61.5%.

Regarding major cost categories, as Larry said earlier, food cost was flat between the second quarter of 2007 and the second quarter of 2008. Labor costs were up 3% and utilities were up 4%. General and administrative expenses of $3.7 million were $.5 million higher than in the second quarter of 2007. Nearly all of the increase was due to unusually high health insurance claims during the current quarter. The company self insures for the cost of employee and dependent medical benefits and purchases stop loss protection on an individual and aggregate basis. Claims during the quarter were unusually high exceeding claims reported in the second quarter 2007 by approximately $.5 million. Excluding these items G&A expenses as a percentage of revenues under management was 5.9% in the second quarter of 2008.

Facility lease expenses were $6.3 million in the second quarter 2008, approximately $.3 million higher than the second quarter 2007 reflecting 25 leased communities these year versus 24 last year along with increases in contingent rent. Depreciation and amortization expense increased $.3 million in the second quarter versus prior year as a result of capital improvement at certain of the company’s owned and leased facilities along with depreciation incurred this quarter related to new information systems which became operational at January 1st of this year. Adjusted EBITDA for the second quarter of 2008 was approximately $14.3 million, an increase of 7% from $13.4 million in the second quarter 2007. Adjusted EBTIDA margin was 29.2% for the period, a 60 basis point improvement from the comparable period of the prior year.

Interest expense of $3 million in the second quarter 2008 was $.2 million less than the second quarter of 2007 reflecting lower debt outstanding due to principal amortization. The company reported a pre-tax profit of approximately $2 million in the second quarter 2008 compared to a pre-tax profit of approximately $1.2 million in the second quarter 2007. Adjusted pre-tax profit for the second quarter 2008 was $2.1 million excluding a small write off our Hearthstone’s due diligence cost. Adjusted pre-tax profit for the second quarter 2007 was $1.8 million excluding the write off of deferred loan costs and non-cash charges for two joint ventures in that period.

The company reported net income of $1.2 million or $0.05 per diluted shares in the second quarter 2008 versus net income of $.8 million or $0.03 per diluted share in the second quarter of 2007. With the adjustments noted above the net income of $0.05 per diluted share in the second quarter 2008 compared to net income of $0.04 per diluted share in the second quarter 2007. On this same basis, adjusted cash earnings were $4.4 million or $0.16 per diluted shares in the second quarter 2008 versus $3.9 million or $0.15 per diluted share in the second quarter 2007. For the first six months of 2008 the company produced revenue of $97.5 million compared to revenue of $93.1 million in the first six months of 2007 an increase of $4.4 million or approximately 5%. Adjusted EBITDA for the first six months of 2008 was $28.7 million an increase of $2.1 million or 8% from the $26.6 million reported for the first six months of 2007. With the adjustments stated previously, the company’s results improved from net income of $2.2 million in the first six months of 2007 to net income of $2.8 million in the first six months of 2008.

Cash earnings on this basis grew from $7.7 million or $0.29 per diluted share in the first six months of 2007 to $8.9 million or $0.33 per diluted share in the first six months of 2008. Capital expenditures in the second quarter of 2008 were approximately $1.9 million. Of this amount approximately $1.1 million represented maintenance spending at the property level. If annualized the $4.4 million annual rate of spending would equal approximately $648 per unit. Cash increased by $1.5 million during the quarter and equaled $26.1 million on June 30th. Mortgage debt was $187.5 million at the end of the second quarter 2008, a reduction of $3.1 million from a year ago. All of our mortgage debt is at fixed interest rates averaging 6.1%.

We’d now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Frank Morgan – Jefferies & Company.

Frank Morgan – Jefferies & Company

I was hoping you could go back through the discussion about trends over the months and talk about also what you saw in July. And then secondly, I think you mentioned that of the 57 out of the 61 you gave an occupancy there in the quarter, could you give that on the same basis from the first quarter? I guess what I’m trying to figure out is on a sequential basis are we really starting to bottom out there or do you really see the trends, the year-over-year trends from continuing?

Lawrence A. Cohen

As I mentioned, the second quarter number for the consolidated communities taking out those four properties was 88.1%. The first quarter, same analysis, we’re looking at 46 consolidated properties was 87.1% so we do see an improvement Q2 compared to Q1 on the same basis. If you look at 60 properties out of 64 in the second quarter, the 60 properties, financial occupancy was 87.8%, again that’s consolidated and managed and then that same 60 properties without the four properties which are undergoing conversions was 86.8% in the first quarter. So both for the entire portfolio as well as the consolidated portfolio we’re seeing 100 basis point improvement. As it relates to July, we experienced, again this is physical occupancy because we don’t yet have financial for July but physical occupancy for July was up 25 basis points and it looks in August like we’ll be up another 20 to 25 basis points again from where we are today.

Frank Morgan – Jefferies & Company

Okay now the 25 basis points which portfolio does that come from?

Lawrence A. Cohen

That’s all 64 properties Frank. Actually, that’s 61 stabilized. The 61 stabilized including the four properties that are undergoing the conversions improved 25 basis points in July and are looking at about a 20 to 25 basis point improvement in August.

Frank Morgan – Jefferies & Company

And the occupancy on the entire 61 at the end of June was what? It’s up 25 but what number are we up 25 basis points off of?

Lawrence A. Cohen

This is actually July off of June. June ended at around 87% physical occupancy, that’s with the converted units and that’s up about 25 basis points in July and it looks like it will be up about another 20 to 25 basis points in August.

Frank Morgan – Jefferies & Company

And in your discussions with the people out in the field about this – I think you understood that the attrition rates, the move out rates are starting to stabilize again and basically is this being driven by more people moving in or the fact that the attrition is slowing down?

Lawrence A. Cohen

It’s really attrition slowing down at this point. I think if you look at our stats for the quarter, our move ins in the second quarter of 08 averaged 4.1 per community which were identical to what they were second quarter of 07. Our attrition was 4.4 versus 4.2 a year earlier, that’s kind of the difference there. What we are seeing is our leads generated are about three times what they were a year ago and what’s interesting is our conversion rate of repeat tours to deposits is running about 70%. Typically that runs closer to the 50% to 55% range. I think what we’re seeing is that people are more need driven for independent living. Another interesting statistic for June is that our independent move ins are outpacing our assisted living move ins where independent move ins in June averaged 4.1 for IL and 2.9 for AL. So, I think what we’re seeing is that we’re getting a lot of outreach, a lot of events, a lot of advertising. We’re really doing a very good job of selling the point of the value that our communities offer in this environment and what we are seeing is that the quality of the people coming in to our buildings and the conversion rate is very positive.

Frank Morgan – Jefferies & Company

One more and then I’ll hope off, in terms of the development fees you’re recording, I’m assuming that kind of rolls off after about the second quarter of next year when those two other properties come on line, if you could confirm that. Then, I think you mentioned that you did have a couple of markets that were weaker, I wonder if you could comment about specifically where do you see the weakness coming from?

Ralph A. Beattie

Frank, I’ll take the development fee question first, we earned development fees over the construction period. They averaged somewhere between $1 million and $1.2 per community. The development fees do cease whenever the properties open but it would be replaced with a management fee at that time so we would continue to earn management fees from these joint ventures that would replace the development fees but you’re correct about when the timing would cease for earning development fees.

Frank Morgan – Jefferies & Company

And I’m assuming though that that management fee initially probably is not going to be as much as the development fee on a quarterly basis? As it rolls off there may be some bumps in the net effect of those two numbers?

Ralph A. Beattie

Right. The management fee is generally about 5% of revenue with a minimum. So, it would not fully replace the development fee but we do have additional developments planned which should be coming on stream to replace the development fees that will be rolling off.

Lawrence A. Cohen

And as far as the markets where we see some weakness, clearly we see it, we have one property in Florida, Verandah Club in Boca Raton. That’s a property that we are converting and one of the reasons we’re taking out from the stable property Verandah Club is we’ve actually taken the building and begun moving residents out of the building and have stopped leasing that building to free it up to have 45 units converted to assisted living and that will be complete in the first half of 2009. California still is a challenging market for us, we have two properties in Sacramento, one in Santa Barbara. Santa Barbara again is one of the properties that are coming out of stable because we are now in the process of getting licensure for additional assisted living units at that community. Detroit has been a market that has been challenging for some time, continues to be. That’s also a property that we’re looking at some conversions there to add more levels of care. But, if you look at the entire portfolio, really we have about four or five properties that really bring down the others and they are again the California, the Detroit and the Florida properties.

I think what is very telling is we ended the month of July with 33 of our properties with more than 90% occupancy. In fact, those 33 properties averaged 94% occupancy last Friday. We have another 12 properties over 85% which actually averaged last Friday 88%. So, I think while everyone is very focused on occupancy, it’s not systemic through our portfolio. We are benefitting from a very strong Texas economy and a very good Texas market. We are benefitting in most of our markets of having a very affordable product that has tremendous customer satisfaction, great marketing, onsite people, very focused at bringing traffic in and with our referrals from our residents we’re seeing our occupancy sustained or improved and again, what we’re finding is that bottom tier of properties that have underperformed some time and obviously that are still challenged that are bringing in the averages but as we go through these conversions you can see the impact when we exclude just four properties from the 54 of what the rest of the portfolio looks like.

Frank Morgan – Jefferies & Company

Just for the record the four properties that are being converted right now?

Lawrence A. Cohen

Right now it’s Peoria in Illinois, it’s Heatherwood in Detroit, it’s Villa Santa Barbara in California and Verandah in Boca Raton.

Operator

Our next question comes from Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Just a handful of things, and I don’t know if I want a whole bunch more numbers but I’m assuming in the same store which is the one I sort of look at a little bit more, I think you quoted it was stabilized the issue of the four that are being converted are in those numbers as well?

Lawrence A. Cohen

Without those numbers I’ll give you that, the same store would have been 3% revenue growth and 3.1% net income growth compared to what we reported.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

And how about occupancy, do you have that there?

Ralph A. Beattie

The same store occupancy with the 87.8% for the quarter for the same store that’s financial occupancy. Physical occupancy you had was reported 89%.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

I mean it really sounds like you’re doing pretty well in this environment. I guess I was trying to think, and maybe you can help me sort of generalize the rest of the business, I mean obviously some of it is market related as you’re in Texas and have less exposure in Florida and California and some other places that may be weak. I think you’re at a lower price point and so I think you’re IL and because of the home health functions more like AL but I mean broader trends people are saying AL is holding up better than IL. We’re hearing from other places that July is seeing an upturn, do you think it’s sort of broad based or do you think your experience is relatively unique, or any color you can give me?

Lawrence A. Cohen

I think you very well articulated our business model. I think that we have continually benefited from being an affordable product in relatively strong markets. We are exposed in Florida but fortunately it’s only one property, in California we have action plans in those locations. We’re very encouraged by July. I would tell you that the mood in the field from marketing is very positive. Traffic is good, there are a lot of events going on and I think that people are very, as I said, are very positive and upbeat which I think is very promising and hopefully the attrition will slowdown as we continue throughout the balance of the year. I think that our product works very well in this environment, we’ve been through cycles before and we typically do very well in this type of market because we are a midmarket product, we are very disciplined on how we approach the business going in to markets which we hope are underserved based on supply and demographics and I think that our operating and marketing team have been in this industry for decades, have been through cycles. And, when you get down to it Jerry, we have great properties, we have great people on site and that’s really the difference.

It’s interesting where we may have a challenge, we change the person on site in marketing or bring back someone – just yesterday we rehired somebody who had left us who was fantastic in one of our locations, it makes a big difference having that right team, very focused on site to generate the type of results we expected.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

And are you doing anything else in terms of incentives, free month rent or discounts or helping people move? I know some of your competitors are actually sending out people to help folks merchandise their houses and that stuff, are there any things like that that you’re doing? I’m just trying to understand a little better as to why the market is sort of having as much impact as it appears to be?

Lawrence A. Cohen

Based on the rate increases that we experienced this quarter, you can see that we don’t have a discounting in place. Now, in selective markets, particularly Florida, California where you have competition discounting then we will selectively discount certain units or give concessions, we typically rather than discount just prefer to get a fourth month or eighth month free. But, what we do there is we will look at the unit that has been vacant the longest, the unit that may have the least desirable location and use that without broad based discounting. We’re still implementing rental increases, through the attrition you can see we are raising our rents and getting good traction there. It’s pretty interesting sequentially to see the improvement from March to June both in net income per unit as well as revenue per unit so we’re not really looking at discounting across the board, it’s in some select markets where to be competitive we will, as I said, work on less desirable units to move those by offering some limited incentives.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Then just a couple other things, when do the fuel contracts expire? That something that we should be worried about through 09?

Lawrence A. Cohen

Our contracts are in Texas. Most of the contracts in Texas run through 2011, some run through 2009. But, what’s interesting, we had our monthly meeting yesterday and as many of you know every month the management teams sits down and reviews every property, the regional’s report. There was not one property that has reported this year a variance on utilities. It has not come up as an issue. So, clearly Texas which has been a high profile market due to the heat wave that’s been down here with 20 plus consecutive days of 100 or so, fortunately, those contracts – most of those contracts do last another two or three years.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

One of the things also I’ve been wondering about is whether this change in the REIT law has any impact on strategic alternatives? Just your broad thinking, I know you don’t want to get in to any details but I assume you’re familiar with the REIT law.

Lawrence A. Cohen

We are familiar, it’s something that will be considered in the process, obviously it was just recently released. It does differentiate independent living from assisted living so it’s something that is interesting and as we review the strategic alternatives it will be considered along with all other [inaudible].

[James A. Stroud]

Jerry, that change in the law was one that had been worked on by the REIT industry and they have been trying to push this through, thought they would have it effectively in 2006, were able to get it through in 2007 and it’s only viewed as a positive for not only our review but as well as the overall industry.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Just on the development, you’re saying that you’re going to be sort of selective, something about the same pace we’re seeing now where you’ve got the kind of one, two, three kind of underdevelopment at any given time and is that [inaudible] feel about the right amount? I mean Ralph had said –

Lawrence A. Cohen

I think kind of the three to five is the range we’re kind of looking at. We’re not looking to really gear up development. I think the pace we’re at right now we’re very comfortable with, we can find we believe good market and good locations that are very promising and I think our plan would be probably that three to five developments a year as a very manageable plan.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

And your expectations is deliveries will continue to sort of fall off because of the credit market as we go forward?

Lawrence A. Cohen

Well we still have a lender on the development that is continuing –

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Not necessarily for you but I mean the industry as a whole.

Lawrence A. Cohen

I think you look at the release a few days ago by one of the public companies cutting back their development by half, I think that’s very good for the industry to see. I do think the local banks, particularly with all the problems they’re having not just with senior housing but in general I have to believe that the pace for financing for construction in this industry will be very, very minimal for many years.

[James A. Stroud]

Jerry, we’re seeing that very much so because it’s not the national companies that often cause us concern, it’s the one off developers that go for multifamily or hotel and go in with their local bank and build and we’re seeing that market just completely shut down.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Are you starting to see any sort of distress opportunities or more purchase opportunities out there as well because of the credit markets?

Lawrence A. Cohen

I think that there are some situations in the marketplace. I think that what we will find is that more opportunities will surface. There haven’t been that many that are compelling at this point but I do believe that will occur particularly when you look at the economies we have in operating our properties. We’re already hearing about some stress of some local operators or some other operators that are very highly levered and having some financial strains where we’re seeing inquiries from their staff to come work for us, we’re seeing residents move in. So, I do think that there may be some opportunities in the future of some more opportunistic investing but so far there have been some but not many opportunities that have surfaced.

Operator

Your next question comes from Todd Cohen – MTC Advisors.

Todd Cohen – MTC Advisors

Just a couple of questions, in the prepared remarks I think Jim referenced cost per unit on the Ohio properties. Could you reiterate that please.

[James A. Stroud]

What I mentioned was that on those communities the average cost is $150,000 per unit and that includes the hard costs, soft costs as well as the lease up costs so that would be an all in cost.

Todd Cohen – MTC Advisors

Then will most of those units, properties be evenly split between the independent living and the assisted living? Will all three have both?

[James A. Stroud]

Generally they have 100 independent living units and 45 assisted living units.

Todd Cohen – MTC Advisors

Then secondly, on your developments in Ralph’s discussion or maybe it was a question, he referenced other development fees coming on I guess early next year so as your Ohio ones roll off. Have any of those developments been announced or are you kind of close to doing that? What’s the deal there?

Ralph A. Beattie

We have, as we announced, the three obviously under construction right now. We continually are looking at sites. Right now we have a number of sites that appear very attractive, they’re being reviewed currently. We have letters of intent out and it’s something we’re looking at for future development in 2009 and beyond.

Todd Cohen – MTC Advisors

The other thing is I know you’re expanding obviously through these developments and conversions and that appears to be a good thing. I’m just curious about the Florida market and the California market and maybe Illinois or Detroit, these have all kind of been problems for an extended period of time from a performance point of view at least. But, it also seems from a kind of geographical or structural point of view these are kind of onesies or twosies in markets that are really pretty far away from your core. So, I’m just kind of wondering is there a way to dispose of these somehow or to trade them just to kind of get them out of the portfolio?

Lawrence A. Cohen

Well, these old properties are leased, we have leases from healthcare REITs on all four of those properties. What’s interesting about those properties is that despite their occupancies Villa Santa Barbara continues – last month operated at a 50% margin, it has the second highest coverage of our leases so I think that the way we operate these properties there’s opportunity there, Verandah Club, and you are correct, these are markets that have had some challenges kind of before the rest of the country and clearly Florida and California are two of the worst housing markets. But, Verandah Club we see that as an opportunity to convert a building, stabilize our property, create value, we’re always hoping there’s a way to move things around. I will say that one benefit we are seeing today in our portfolio is some diversification as you see markets turn through the times and the fact that we have large concentrations in Texas are helping moderate the effects of California or Florida. So, structurally the properties in California and Florida are all leased we don’t own those so it’s not something we can have as much control over as an owned asset and we are working on improving their operations and, as I said, they are cash flowing and particularly when you look at Villa Santa Barbara for example, even at its occupancy last month which was in the kind of mid 70% range still had a very, very high margin and still had very strong cash flow.

Operator

At this time we have no further questions so I’d like to turn the call back over to management for any additional or closing remarks.

[James A. Stroud]

We obviously appreciate everyone’s interest in Capital Senior Living and wish you good day. Thank you.

Operator

This does conclude today’s teleconference. You may now disconnect.

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: transcripts@seekingalpha.com. Thank you!

Source: Capital Senior Living Corporation F2Q08 (Qtr End 6/30/08) Earnings Call Transcript
This Transcript
All Transcripts