Capital Senior Living Corporation (CSU)

CSU 
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Capital Senior Living (CSU)

Q1 2013 Earnings Call

May 07, 2013 11:00 am ET

Executives

Lawrence A. Cohen - Chief Executive Officer and Vice Chairman

Ralph A. Beattie - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Dana Vartabedian - Deutsche Bank AG, Research Division

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Dana Hambly - Stephens Inc., Research Division

Peter Sicher - Sidoti & Company, LLC

Wilson S. Jaeggli - Southwell Management, L.P.

Presentation

Operator

Good day, and welcome to the Capital Senior Living First Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded. The forward-looking statements in this release [ph] are subject to certain risks and uncertainties that could cause results to differ materially, including, but not without limitation to, the company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Lawrence A. Cohen

Thank you, and good morning, and welcome to Capital Senior Living's First Quarter 2013 Earnings Release Conference Call. I am very pleased to report continued strong results for the first quarter, which is typically a challenging period. Excellent expense management has yielded significant growth in net operating income, despite the effects of normal seasonality and an active and prolonged flu season.

First quarter same-community occupancies increased 70 basis points from the comparable quarter of the prior year and CFFO grew by approximately 45%. Recent trends indicate solid growth in occupancy in the second quarter. Our robust pipeline allows us to continue our disciplined and strategic acquisition program that increases our ownership of high-quality, senior living communities in geographically concentrated regions and generate meaningful increases in CFFO, earnings and real estate value. We differentiate Capital Senior Living as the value leader in providing quality seniors housing and care at reasonable prices. We are well positioned to make meaningful gains in shareholder value as a substantially private-pay business in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market.

In the first quarter, we completed the acquisition of a senior living community in Nebraska for a purchase price of approximately $6.7 million. This transaction is expected to add CFFO in earnings of $0.01 per share and increase revenue by $2.6 million. This community was financed with another community we acquired in October 2012 to repay its bridge loan with a combined loan proceeds of $16.4 million, a 10-year fixed-rate nonrecourse debt with an interest rate of 4.66%. The effective cash-on-cash return on equity on the Nebraska acquisition is greater than 18%. We are conducting due diligence on additional transactions consisting of high-quality senior living communities in regions where we have extensive existing operations. Subject to completion of due diligence and customary closing conditions, we expect to acquire these additional communities in the second and third quarters of this year.

I would now like to review our operating activities. I am pleased to report that in addition to the success that we are experiencing with our acquisition program, we are also achieving strong operating results with gains in occupancy and net operating income. We benefit from our proprietary expense management systems, our community-based empowerment philosophy, our operating strategy to provide value to our senior living residents and our geographically concentrated operating platform with most of our regions enjoying better economies than national averages. We believe we are different from other companies in our peer group with our sole focus on the substantially all private-pay senior living business, capitalizing on our competitive strengths in operating communities in geographically concentrated regions and profiting from our competitive advantages as a larger company with economies of scale and proprietary systems operating in a highly fragmented industry that continues to generate excellent results.

At communities under management, excluding 1 community that had a recent conversion, same-community revenue in the first quarter of 2013 increased 3.1% versus the first quarter 2012. Same-community expenses increased 0.9% and net operating income increased 6.4% with margins improving by 100 basis points from the first quarter of the prior year. Our same-community occupancies increased 70 basis points from the comparable quarter of the prior year and were down 80 basis points sequentially. Lower sequential occupancies resulted from the effects of normal seasonality and an active and prolonged flu season.

We quarantined dozens of communities during the flu season, which limited prospects from touring our communities in January and February. This protocol delayed first quarter move-ins to the latter part of the quarter. In addition, we had more move-outs than anticipated in the first quarter, primarily due to death and higher levels of care. Fortunately, first quarter 2013 same-store deposits were 3% higher than in the comparable period in 2012. I am pleased to report that occupancy growth has been positive since the middle of March with net gains in occupancy resulting from more move-ins and fewer move-outs for March and April. And the outlook for May is very strong.

We anticipate solid growth in occupancy in the second quarter, which is typically a strong period. For example, last year, in 2012, we gained 117 units of occupancy in the second quarter for a 1.1 percentage point gain in occupancy during the quarter. Same-community occupancy over the past year reflected occupancy gains in independent living exceeding those in higher levels of care resulting in average monthly rents 2.1% higher than the first quarter of 2012. Sequentially, same-community average monthly rents were 60 basis points higher. Industry fundamentals continue to be strong with demand continuing to outpace supply.

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