Knobias Clip Report (10-25-2007)

Submitted By Knobias ClipReport

CSU: Aging Population Could Cause Increasing Profits

While the housing market has seen a massive decline in the past months because of credit woes and the subprime fallout, there are some niches in the industry that could still see a boost even with the collapse all around it.

The first baby boomer was just announced as starting the process to sign up for Social Security retirement benefits. Over the next two decades, nearly 80 million more baby boomers (who were born between 1946 and 1964) will become eligible for Social Security benefits. The number equals out to more than 10,000 per day.

According to the US Census Bureau, between now and 2050 the population of older adults living in the US will double, while growing at an annual rate of 2.8% a year. In 2030, 33% of the population will be 75 years old or older. 9% will be 85 years old or older.

With the aging of the population, a growth in assisted living housing and companies involved in the area is inevitable. One name in the industry is Capital Senior Living Corporation (CSU). The Company 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.

The Company owns and/or operates 64 communities in 23 states with the ability to serve 9,544 residents. 49 of the communities are owned or leased with resident capacity of 7,636.

The Company’s latest earnings report in August showed revenue of $46.9 million which increased $9.2 million or approximately 24% from the second quarter of 2006. Adjusted EBITDAR (income from operations plus depreciation and amortization and facility lease expense) of $13.4 million increased approximately 40% from the prior year period. Second quarter 2007 net income was $0.8 million versus a loss of $2.5 million in the second quarter of the prior year. The Company also refinanced $30.0 million of mortgage debt on four owned communities with Federal National Mortgage Association ("Fannie Mae"). These four mortgages each have a term of ten years and a fixed interest rate of 5.9%, approximately 170 basis points below the variable rate debt which was replaced. Since the first quarter, the company has reduced mortgage debt by $51 million, refinanced or retired $162 million, and reduced their average interest rate from 7.5% to 6.1%, resulting in $8.3 million in annual interest expense.

CSU has noted that the Company is looking for acquisition candidates or joint venture announcements, particularly where the Company could also acquire the management contract.

With some $24 million in cash, an acquisition might be a bit out of reach, but a joint venture could easily pay dividends for the Company. The Company has also received some attention from analyst. On October 8th, Stifel Nicolaus upped the Company from a hold to a buy and set their new target price to $11. The firm noted that after the National Investment Center for the Seniors Housing and Care Industry (NIC) conference, the firm expected operators to report improved occupancy in the third quarter results and were less concerned about the negative impact of new construction because they expect construction to be constrained by tighter credit markets.

In any event, third quarter earnings are expected to be released on November 6th. With a growth in their occupancy rate and continued attempts to grow through acquisition or joint venture, the name would certainly be one to watch even with the extended multiples the industry currently enjoys.



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