Capital Senior Living Corporation (CSU)

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Capital Senior Living Corporation (CSU)

F2Q08 Earnings Call

August 6, 2008 11:00 am ET


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


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.

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