Emeritus Corporation CEO Interview: Granger Cobb

• On 2:30 pm EDT, Tuesday September 22, 2009

67 WALL STREET, New York - September 22, 2009 - The Wall Street Transcript has just published its Medical Real Estate: Healthcare REITs, Long-Term Care Facilities and Hospitals Report offering a timely review of the sector to serious investors and industry executives. This 45 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investor Perception -- Secular Shift -- Health Care Reform -- REITs Growth -- Public Markets -- Divident Yields -- Debt Levels -- Grow Generation -- Outpatient Versus Inpatient Care -- Health Care Delivery -- Leaseback Arrangements -- Skilled Nursing -- Seniors Housing -- Growth and Expansion -- Positioning the Company for Winning -- Portfolio Diversification -- Geographical Growth -- Advantages to Investing in Licensed Hospitals -- Higher Returns -- Underwriting -- Fragmented Industry -- Consolidation Opportunities -- Debt Refinancing -- Growth in Health Care Spending

Companies include: LifePoint Hospitals (LPNT); Community Health Systems (CYH); Psychiatric Solutions (PSYS) and Tenet (THC); Medical Properties Trust (MPW); Healthcare Realty Trust (HR); LTC Properties (LTC); Health Care REIT (HCN); National Health Investors (NHI); HCP Inc. (HCP); Alexandria (ARE); BioMed (BMR); Senior Housing Properties Trust (SNH); Omega Healthcare Investors (OHI); Ventas (VTR); Emeritus (ESC); Brookdale (BKO); Fannie Mae (FNM); US Physical Therapy (USPH); AmSurg (AMSG)

In the following brief excerpt from the 45 page report, Granger Cobb, President and Co-Chief Executive Officer of Emeritus Corporation, discusses the company and the outlook for the sector and for investors.

TWST: Would you start by giving us a brief history of the company?

Mr. Cobb: We were founded back in 1993 and went public in 1995. We were founded by Dan Baty and Ray Brandstrom, and one other gentleman. Dan is currently Chairman and Co-CEO together with me, and Ray is our CFO. So they are still very much involved with the company. We started with a single community in the Seattle area, and we now operate 309 communities in 38 states, so we're one of the largest senior living providers. We are focused on assisted living, which is the more need-driven side of the sector. Only about 7% of our business is independent living. Our market is primarily middle- to upper middle-class seniors. So while we span the whole range in different markets, the majority of our communities are usually positioned just below that highest tier. There might be a provider that is at the very highest price point; we're usually in the second tier there and probably have a little bit wider band of individuals that can afford our product. About 90% of our revenue is private pay. We have about 10% that's funded by various Medicaid programs in certain states. And we've been focused on growth over the course of the last several years, both internal growth and external growth. Internally, it's moving our occupancy rates up and trying to hold our expenses so as to keep things as efficient as possible on the expense side. We're a business that is kind of a high fixed-cost business. When we turn on the lights and open the doors of a community, we have a lot of fixed costs in place. When our occupancy gets above about 80% - somewhere in the low 80s is usually a breakeven point - then most of the incremental revenue above that flows to the bottom line. So occupancy is really key.

TWST: You mentioned the key elements, but is there anything else about your overall business model or business strategy that you want to point out?

Mr. Cobb: Our industry is a very fragmented industry. I think the 10 largest operators operate about 30% of the assisted living communities in the country. So there is a lot of opportunity for consolidation, and we view ourselves as a consolidator. We are in a phase right now which, oddly enough, has led to a lot of opportunity. And it has to do with the shutting down of the credit markets. There is no lending right now for new construction, so there is no new capacity coming on for at least the next two or three years. Even if and when lending or construction comes back, which is probably a year or so away, it'll take everyone a couple years to really gear up their development pipeline again and actually get new capacity out of the ground and open. So there's probably a window of about three to four years where almost no new supply will come online, and yet our demographic target market is still expanding by 200,000 people a year. So just because of what has happened over the course of the last year, it's an interesting dynamic and opportunity for us, I think, over the next few years.

TWST: You mentioned that you see your company as a consolidator. Talk a bit more about what growth opportunities you see for the company in the future.

Mr. Cobb: I think that, again partly because of the credit market, there are some companies out there that have been a little bit squeezed if they had financing that came due. Whereas originally when they put it in place they were getting 85% to 90% loan-to-value and very favorable underwriting in terms of appraisals, and life was good in terms of that, these days you have to put up considerably more equity to finance. There is still financing available, but the underwriting is definitely not what it was several years ago. So I think that has put some pressure on some of the operators that have good communities and good locations, but they maybe don't have the equity that they need to continue to operate them. We are seeing now, I think, some opportunities begin to come across the desk, large and small, everything from one-off acquisition opportunities to large portfolios. People are starting to look at strategic options, basically. And so I think that we'll see, toward the end of this year and into next year, some real interesting opportunity in terms of that, and the pricing will be below replacement cost. Those are always attractive options for us if we can acquire below what we could build it for.

TWST: Do you see this taking the form of single property sales and property portfolios, or M&A activity?

Mr. Cobb: I think we are seeing some of that in every one of those categories. So I think it could be all of the above. It'll be interesting to see how that all materializes over the next few months.

TWST: What has your company done to position itself for those opportunities from a fiscal and capital point of view?

Mr. Cobb: We have made sure that we are comfortable with our balance sheet. We've refinanced any debt with near-term maturities and pushed it out to pretty much 2012 and beyond. So we feel pretty good about that. We've got cash in the bank, and we're cash-flowing, so we feel pretty good about our position from that standpoint. We've got lines of credit that we haven't touched yet. So I think we're in good shape there. But in addition, we've always maintained good relationships with the REITs. And most of the REITs, or at least the assisted living REITs, are now fairly cash flush. They would be interested in partnering up with us either on a joint-venture basis or them buying the property and leasing it to us. So we have those options that we can utilize as well. So depending on the type of opportunity that is out there, we've lined up all of our various financing partners and, I think if the deal is good, we'll figure out a way to get it done.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 45 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

Buzz up!