Assisted Living Concepts reports financial results for third-quarter 2009

Nov 9 2009

Assisted Living Concepts, Inc. ("ALC") (NYSE: ALC) reported net income from continuing operations and net income of $4.2 million and $3.4 million, respectively, in the third quarter of 2009 compared to net income from continuing operations and net income of $3.1 million and $3.0 million, respectively in the third quarter of 2008.

"We continue to be pleased with the results of the private pay transition plan we began in 2006. Not only did we increase private pay occupancy in the third quarter but October was an even stronger month for us. We increased the percentage of revenues from private pay residents from 78.9% in the third quarter of 2006 to 95.7% in the third quarter of 2009," commented Laurie Bebo, President and Chief Executive Officer of Assisted Living Concepts, Inc. "The private pay transition, together with reduced administrative costs, resulted in record adjusted EBITDAR margins."

During the third quarter of 2009, ALC elected not to exercise a purchase option on five residences it operates under a master lease agreement. As a result, at December 31, 2009 ALC will cease operations at four of the five residences and has classified these four residences (consisting of 118 units) as discontinued operations. ALC will continue to operate the remaining residence (consisting of 39 units) under an operating lease which expires in February 2014. As a result of not exercising the purchase option, ALC recorded a non-cash, non-recurring write-off of $0.9 million (net of tax benefits of $0.5 million) resulting from the remaining book value of assets to be retained by the lessor, partially offset by the elimination of the remaining capital lease obligation. Approximately $0.1 million and $0.8 million of the net non-cash, non-recurring write-off was recorded in continuing and discontinued operations, respectively. Excluding this charge both net income from continuing operations and net income for the quarter ended September 30, 2009 would have been $4.3 million.

For the nine months ended September 30, 2009, ALC reported a net loss from continuing operations and net loss of $3.5 million and $4.5 million respectively, compared to net income from continuing operations and net income of $11.5 million and $11.3 million, respectively in the nine months ended September 30, 2008. The nine month loss was due to a write-off of goodwill in the first quarter of 2009.

Excluding an impairment charge related to the non-cash, non-recurring write-off of goodwill of $14.7 million (net of income tax benefits) recorded in the first quarter of 2009 and the non-cash, non-recurring write-off of the remaining book value of the assets remaining with the lessor in the third quarter of 2009, net income from continuing operations and net income for the nine months ended September 30, 2009 would have been $11.3 million and $11.1 million, respectively.

Diluted earnings per common share for the third quarter and the nine months ended September 30, 2009 and 2008 were:

Quarter ended Nine months ended September 30, September 30, 2009 2008 2009 2008 ------- ------- ------- ------- Diluted earnings (loss) per common share from continuing operations $ 0.36 $ 0.25 $ (0.30) $ 0.91 Diluted earnings (loss) per common share $ 0.29 $ 0.24 $ (0.38) $ 0.89 Pro forma diluted earnings per common share from continuing operations excluding one-time charges $ 0.36(1) $ 0.26(3) $ 0.96(1)(2) $ 0.91(3) (1) Excludes non-cash non-recurring write-off of assets remaining with the lessor, net of income tax benefits. (2) Excludes non-cash non-recurring write-off of goodwill net of income tax benefits. (3) Excludes non-cash write off of assets damaged as a result of hurricanes, net of income tax benefits. See attached tables for non-GAAP reconciliations and calculations of weighted average basic and diluted shares.

Effective June 16, 2009 ALC implemented a one-for-five reverse stock split of its Class A and Class B common stock. All share and per share data in this press release have been adjusted to reflect this reverse stock split.

Certain non-GAAP financial measures are used in the discussions in this release in evaluating the performance of the business. See attached tables for definitions of Adjusted EBITDA and Adjusted EBITDAR, reconciliations of net income (loss) to Adjusted EBITDA and adjusted EBITDAR, calculations of adjusted EBITDA and Adjusted EBITDAR as a percentage of total revenues (Adjusted EBITDAR and Adjusted EBITDA margins), and non-GAAP financial measure reconciliation information.

As of September 30, 2009, ALC operated 216 assisted living residences comprising 9,399 units. This includes four assisted living residences consisting of 118 units classified as discontinued.

The following discussions exclude the impact of discontinued operations unless otherwise specified.

Quarters ended September 30, 2009, September 30, 2008, June 30, 2009

Revenues of $57.2 million in the third quarter ended September 30, 2009 decreased $0.5 million or 0.9% from $57.7 million in the third quarter of 2008 and increased $0.6 million or 1.0% from the second quarter of 2009.

Adjusted EBITDA for the third quarter of 2009 was $14.2 million, or 24.7% of revenues and

-- increased $2.7 million or 23.2% from $11.5 million and 19.9% of revenues in the third quarter of 2008; and -- increased $0.9 million or 6.6% from $13.3 million and 23.4% of revenues in the second quarter of 2009.

Adjusted EBITDAR for the third quarter of 2009 was $19.2 million, or 33.6% of revenues and

-- increased $2.7 million or 16.6% from $16.5 million and 28.5% of revenues in the third quarter of 2008; and -- increased $0.9 million or 5.1% from $18.3 million and 32.3% of revenues in the second quarter of 2009.

Third quarter 2009 compared to third quarter 2008

Revenues in the third quarter of 2009 decreased from the third quarter of 2008 primarily due to the planned reduction in the number of units occupied by Medicaid residents ($2.0 million) and a reduction in the number of units occupied by private pay residents ($0.7 million), partially offset by higher average daily revenue as a result of rate increases ($2.2 million).

Both Adjusted EBITDA and Adjusted EBITDAR increased in the third quarter of 2009 primarily due to a decrease in residence operations expenses excluding the impact of damage caused by hurricanes in 2008 ($2.8 million) and a decrease in general and administrative expenses excluding non-cash equity based compensation ($0.4 million), partially offset by a decrease in revenues discussed above ($0.5 million). Residence operations expenses decreased primarily from lower labor and kitchen expenses as well as the absence of non-recurring expenses associated with hurricanes. Staffing needs in the third quarter of 2009 as compared to the third quarter of 2008, were lower because of a lower number of Medicaid residents who tend to have higher care needs than private pay residents. General economic conditions which enabled us to hire new employees at lower wage rates and new group purchasing plans which lowered purchasing costs resulted in lower labor and kitchen expenses. General and administrative expense decreased primarily from a change in timing of ALC's all-company annual conference, which occurred in the third quarter of 2008 and is expected to occur again in the second quarter of 2010.

Third quarter 2009 compared to the second quarter 2009

Revenues in the third quarter of 2009 increased from the second quarter of 2009 primarily due to one additional day in the third quarter of 2009 quarter ($0.6 million), an increase in the number of units occupied by private pay residents ($0.3 million), and higher average daily revenue as a result of rate increases ($0.1 million), partially offset by the planned reduction in the number of units occupied by Medicaid residents ($0.4 million).

Increased Adjusted EBITDA and EBITDAR in the third quarter of 2009 as compared to the second quarter of 2009 resulted primarily from an increase in revenues discussed above ($0.6 million), a decrease in general and administrative expenses excluding non-cash equity based compensation ($0.2 million) and a decrease in residence operations expenses ($0.1 million). Residence operations expenses decreased primarily from lower labor expenses associated with lower numbers of Medicaid residents, partially offset by seasonal increases in utility costs. General and Administrative expenses decreased primarily due to a legal settlement favorable to previously estimated amounts.

Nine months ended September 30, 2009 and September 30, 2008

Revenues of $171.0 million in the nine months ended September 30, 2009 decreased $3.5 million or 2.0% from $174.5 million in the three quarters ended September 30, 2008.

Adjusted EBITDA for the nine months ended September 30, 2009 was $39.0 million, and 22.8% of revenues and increased $1.5 million or 4.1% from $37.4 million and 21.5% of revenues in the nine months ended September 30, 2008.

Adjusted EBITDAR for the nine months ended September 30, 2009 was $53.9 million, and 31.5% of revenues and increased $1.6 million or 3.1% from $52.3 million and 30.0% of revenues in the nine months ended September 30, 2008.

Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

Revenues in the nine months ended September 30, 2009 decreased from the nine months ended September 30, 2008 primarily due to the planned reduction in the number of units occupied by Medicaid residents ($6.0 million), a reduction in the number of units occupied by private pay residents ($3.4 million) and, as a result of 2008 being a leap year, one less day in the nine months ended September 30, 2009 ($0.6 million), partially offset by higher average daily revenue as a result of rate increases ($6.5 million).

Both Adjusted EBITDA and Adjusted EBITDAR increased in the nine months ended September 30, 2009 primarily due to a decrease in residence operations expenses ($5.2 million) partially offset by decreased revenues discussed above ($3.5 million), an increase in general and administrative expenses excluding non-cash equity based compensation ($0.1 million) and for EBITDA only an increase in facility rent expense ($0.1 million). Residence operations expenses decreased primarily from lower labor and kitchen expenses as well as absence of non-recurring expenses associated with hurricanes. Staffing needs in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008, were lower because of a lower number of Medicaid residents who tend to have higher care needs than private pay residents. General economic conditions which enabled us to hire new employees at lower wage rates and new group purchasing plans which lowered purchasing costs resulted in lower labor and kitchen expenses.

Expansion Program Update

By the end of the third quarter of 2009 we had completed, licensed, and begun accepting new residents in 322 units under our program to add 400 units to existing owned buildings. Construction continues on the remaining expansion units. We are currently targeting completion of 78 units by the third quarter of 2010. To date, actual costs remain consistent with our original estimates of $125,000 per unit.

Liquidity

At September 30, 2009 ALC maintained a strong liquidity position with cash of approximately $5.9 million and undrawn lines of $65 million.

Discontinued Operations

On January 1, 2005, ALC entered into a master lease agreement for five residences located in Oregon totaling 157 units. The master lease included what was determined at January 1, 2005 for accounting purposes to be a "bargain purchase option" and was accounted for as a capital lease. The master lease gave ALC the right to purchase all five buildings for total consideration of $10.3 million consisting of the assumption of $4.7 million of Oregon Housing and Community Services Bonds and $5.6 million in cash. The master lease provides that, in the event the option is not exercised, ALC will continue to lease one of the residences under a prior operating lease. Based upon the current operating performance, the assumption of bonds with an average rate of 8.03%, and various operating restrictions under the bond indentures, ALC determined it was not economically or operationally prudent to exercise the option to purchase these properties at the predefined price.

As a result, ALC expects to terminate operations at four residences consisting of 118 units on December 31, 2009 and to continue operating one residence consisting of 39 units under an operating lease expiring in February 2014 (with a right to extend an additional five years). At September 30, 2009, the decision to not exercise this option resulted in the reduction of $10.5 million of ALC's obligations under the capital lease and a $11.8 million reduction in assets on ALC's balance sheet.