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Emeritus Corporation (ESC)

Q3 2008 Earnings Call Transcript

November 10, 2008, 5:00 pm ET


Brad Cohen – IR, ICR

Dan Baty – Chairman and Co-CEO

Ray Brandstrom – EVP of Finance, CFO and Treasurer

Granger Cobb – President and Co-CEO


Donald Hooker – UBS

Rob Mains – Morgan Kean

Jerry Doctrow – Stifel Nicolaus

Brian Hue [ph] – Sidoti & Company

Carter Dunlap – Dunlap Equity

Steve Son [ph] – UBS



Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Emeritus Corporation third 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 questions. I would like to remind everyone that this conference is being recorded.

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

Brad Cohen

Thanks Jennifer. Good afternoon everyone and thank you for joining us on the Emeritus Corporation third quarter 2008 conference call. On the call with me today is Dan Baty, Chairman and Co-CEO; Granger Cobb, President and Co-CEO; and Ray Brandstrom, Chief Financial Officer.

Before we begin today, I would like to remind everyone of the Safe Harbor statements 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’ 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. Dan, please go ahead.

Dan Baty

Taking the macro view, healthcare and senior housing is basically a counter cyclical business. We have historically done relatively better when other sectors are down. Our cost of labor is relatively lower and our customer is less impacted by economic swings. I would argue that our residents are in the same economic position as they were a year ago. They own their own homes without a mortgage. While the value of that home may be less than it was a year ago, it is still significantly greater than when they bought it.

Our residents’ investments are savings and bonds, not stocks. Not too many people over 75 have large margin accounts. In addition, there is no new supply. Whatever was in the pipeline has pretty much got canceled. Other than the psychological impact of the market volatility, which can slow down decision-making, given the AL [ph] business is need-driven and based on my 35 years in senior housing, I don’t think our customer is disappearing.

Looking at Emeritus specifically, our average rate is up, our occupancy is up, our overhead is flat, and on a quarter-to-quarter basis, second to third, adjusting for non-comparable items, expenses are up modestly.

Our balance sheet is in good order. We have $43 million in cash and our only short-term debt maturing within the next year will mostly be refinanced on a long-term basis and the remainder, and for that matter, the whole debt can be extended.

Granger and his operating group have done an outstanding job integrating the operations and effecting significant improvements. Ray has put us in an excellent financial position. Ray?

Ray Brandstrom

Thanks, Dan. Good afternoon, everyone. I’d like to begin by discussing our third quarter results, give an update on our balance sheet, and finish by providing some additional comments regarding our 2008 financial guidance.

The third quarter marks our last quarter of non-comparable financial results due to Summerville merger. In the fourth quarter, we’ll begin to have some meaningful year-over-year comparable data. But this quarter, I would again remind you that the merger with Summerville closed on September 1, 2007 impacting year-over-year analysis for the third quarter.

Therefore my comments will focus on sequential quarters. Let me start with a discussion on discontinued operations. We continue to hold three properties comprising a total of 310 units in discontinued operations. All revenue and expense for assets in discontinued operations are reported as one line item on income statement. These communities have been removed from reported occupancy statistics for comparison purposes in all financial information reported.

Now, I’m going to review some of the operating statistics from the quarter. Total revenue from continuing operations for the third quarter of 2008 was $193 million. Of that, total community revenue from continuing operations was $191.8 million compared to $185.7 million in the second quarter of 2008, an increase of $6.1 million or 3.3% on a sequential basis.

Most of these $6.1 million increase is related to rate growth. Our average rate per unit increased to $3449 per month from $3372, a 2.3% increase on a sequential basis. A significant number of legacy Emeritus communities realized annual rate increases in the third quarter, which combined with the level of care revenue captured drove the strong quarterly rate increase.

Most importantly, the third quarter rate improvement brought our year-to-date revenue per unit rate growth to over 6% annualized, a level more in line with our expectations.

Average occupancy for the third quarter was 86.6% up from 86.4% in the second quarter. Occupancy on the last day of the third quarter September 30th was 88.1%, up 30 basis points from occupancy of 87.8% on June 30th. We believe the quarterly improvement in occupancy in the current economic climate speaks to the effectiveness of our programs and initiatives we implemented since last year and the need-driven demand for assisted living in Alzheimer’s business.

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