EXERT OPINION with Larry Cohen

October 22, 2009

Larry Cohen
In this “Expert Opinion” interview, Larry Cohen discusses some of the current trends in the seniors housing industry and how Capital Senior Living has adjusted its model and expanded its operations to deal with changes in the marketplace.

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Larry Cohen is Vice Chairman of the Board and Chief Executive Officer of Capital Senior Living Corporation. Mr. Cohen serves on the boards of various charitable organizations and was a founding member and is on the executive committee of the Board of the American Seniors Housing Association. From 1991 to 1996, Mr. Cohen served as President and Chief Executive Officer of PaineWebber Properties Incorporated, which controlled a real estate portfolio with a cost of approximately $3 billion, including senior living communities of approximately $110 million. Mr. Cohen has earned a Masters in Law in taxation, is a licensed attorney and is also a Certified Public Accountant. He has had positions with businesses involving senior living for 21 years.

Capital Senior Living Corporation is one of the nation’s largest operators of residential communities for senior adults. The Company’s operating philosophy emphasizes a continuum of care, which integrates independent living, assisted living and home care services, to provide residents the opportunity to age in place. Capital Senior Living currently operates over 60 senior living communities throughout the nation. In the communities operated by the company, 69 percent of residents live independently, 24 percent of residents require assistance with activities of daily living and 7 percent or residents live in continuing care retirement communities. Capital Senior Living also offers an array of development, management and marketing services.

Contact Information:
Lawrence Cohen, CEO
Capital Senior Living
300 Park Avenue, Ste 1700
New York, NY 10022
Phone: 212-551-1770
www.capitalsenior.com
  
Read the interview transcript:

Steve Monroe
All right, I’m here this morning with Larry Cohen at the NIC Conference.  He’s the president and CEO of Capital Senior Living, a New York Stock Exchange company.

Larry, just six months ago, things were looking a little scary out there.  Stock prices hit a low in March, the housing market was dead, consumer and business confidence were at record lows.  Everyone was focusing on seniors housing occupancy levels.  We seem to have turned a corner on that front as an industry.  What’s been the biggest factor that you have seen with your customers, both when things slowed down and as things started picking up this summer?  Can you describe what was happening?

Larry Cohen
Steve, I think, not only our customer, the whole nation had this fear still upon them in the fourth quarter of 2008.  Our financial markets were catastrophic.  News reports coming out about failures of major financial institutions had an impact on the psychology of our consumers, their adult children and most of our nation.

Fortunately, what we have seen since May has been a confidence that has really instilled back, I think, in the consumer, as confidence levels have improved, the housing market has stabilized over the summer.  And we have been tracking very much with a lot of the data coming out regarding consumer confidence in housing as we see a steady improvement in our occupancies that began towards the end of May.

Steve Monroe
Have you see any difference in demand between your assisted living product and your independent living product?

Larry Cohen
It’s a very interesting question, Steve.  About five years ago, we began a program where we started to rent offices to home health care agencies in our independent living communities.  Therefore, the profile of our independent resident is a little frailer than you may see in the pure independent living setting.

Because of that, we really have seen very steady move-ins, as well as attritional levels, of both our independent and our assisted living throughout this year.  However, we have seen a more steady occupancy level, week after week, month after month, in assisted living versus independent living, because of the need-driven nature of assisted living.

Steve Monroe
And you’ve been converting, over the last 18 months or so, you’ve been converting independent living units, not all, but in some of your communities, over into assisted living.  How does that work for you from a cash flow and occupancy basis?  And are you going to do that with more of your communities in the future?

Larry Cohen
We have always had a philosophy of providing superior care to our residents.   And you’re correct, about a year and a half ago we identified around six or seven communities that we could add more levels of care by either expanding or adding assisted living or dementia care to residents within our communities.  That has been very successful.  What we have seen is we have broadened the depth of our markets, we’ve seen more transfers of our residents from independent living to assisted living.  And it is also very profitable, because we’re able to generate about a 60% margin on incremental revenue of those units since much of the infrastructure of our staffing and operations are already set in those communities, and then we are able to get higher rent for those levels of care and higher margins.

So it has been very successful for us.  Unfortunately, many of our independent living buildings are in states where building codes don’t permit them to be converted to assisted living.  However, we do have communities where there are parcels where we can expand those communities to add more levels of care by adding more units.  But I think in this environment, as far as the current situation, we’ll delay the expansion, assuming we can get a little more confidence in of our economy.

Steve Monroe
And you have a couple last, new community developments that you were finishing up and then you’ll be out of the development business.  Do you see yourself getting back in at some point or any kind of timeframe, if you do?

Larry Cohen
Well, we’re actually out of the development business right now.  We opened our last two newly-built communities this past August.  And had actually been very pleased with the success of the lease-up.  In fact, with a building in Toledo, we had thirteen move-ins this month, so it’s been very well received.  But we’ve dismantled our development team based on acquisition opportunities, where we can purchase today at prices below replacement cost.  And with Fannie Mae and Freddie Mac providing financing that’s attractive, we believe that over the next couple of years our focus will be more on acquisitions, organic growth and probably won’t consider development again until another three to four years.

What’s interesting about this industry is not only that we disbanded our development teams, most companies have.  Now, I think that’s actually very positive for our industry, because it’s unlikely that the next three to five years to see much of the supply coming online and, obviously, we’re seeing demand pick up, occupancy pick up, the demographics are in our favor and I think that the outlook over the near term is very positive for senior housing because of the likelihood that supply will continue to with this trend.

Steve Monroe
And as occupancy increases and with no new supply coming on, where you have the land, would you add, would you build new units, where there’s the land available?

Larry Cohen
Yes, in that type of scenario, we would look to expand and add new units.  We actually had a number of sites that we’re working on that we had either adjacent to our communities or parcels that we owned and we decided again, at the end of the fourth quarter of 2008, to suspend those initiatives.  But as you point out, occupancies improved, there’s not much supply coming online and we see the demand, then we will go back and look to expand the units or higher levels of care to provide the continuum in one place.

Steve Monroe
How about Alzheimer’s here?  That’s probably, Alzheimer’s units and facilities probably performed the best of all categories over the last 12 to 18 months.  Do you see yourself converting—I know you have some regulatory issues in certain states—but do you see converting some units to Alzheimer’s, memory care, to take advantage of that?  Or is that just too different of a business model?

Larry Cohen
Actually, we have 10 communities today that have memory care units in them.  What’s interesting is we still have, about two-thirds of our operations are independent living.  But what people don’t realize is that, since 2000, every development and every acquisition we’ve made has been either independent living with assisted living or assisted living or assisted living with Alzheimer’s care.  So we’re very comfortable with Alzheimer’s care, as I’ve said, we have it in about 10 of our buildings today.  And some of the expansions and our conversions we’re working on contemplate having memory care units in those communities.

Steve Monroe
So, obviously, a market you’re going to go after.

Larry Cohen
Yes.

Steve Monroe
And your balance sheet is in very good shape.  You basically refinanced pretty much all of your debt, you’ve got no debt maturity issues facing you.  So this market is very good.  How does the acquisition market look for you?  With that balance sheet in good shape, in 2010, you think you’re going to see some opportunities?

Larry Cohen
We’re optimistic that we will see opportunities.  And thank you for your kindness.  We were fortunate, and hindsight always looks a little better, but beginning in 2005, we recognized the ability to reduce our debt, or convert variable rate debt to fixed rate and extend maturities out, really, to 2015 and beyond.

As a result, we are fortunate that we have a strong balance sheet.  We also have very strong institutional relationships with joint venture companies and REITs that we also can team up with for acquisitions.  And we believe that there will continue to be opportunities, I think opportunities will be more plentiful in 2010 where we can acquire communities from challenged operators, operators or owners with difficult balance sheets, with maturities that may be difficult to refinance.  And we are optimistic that 2010 will be a good year for acquisitions.

Steve Monroe
You know me, I’m always glad to hear that.  Well, thanks for spending time with me today and have fun the rest of the conference.

Larry Cohen
Steve, thank you very much.

 

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