Alerislife Inc (ALR) 2009 Q2 法說會逐字稿

Good day and welcome to the Five Star Quality Care Second Quarter 2009 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you. Good afternoon everyone. Joining me on today's call are Bruce Mackey Five Star's President and CEO, and Fran Murphy Five Star's CFO. The agenda for today's call includes a presentation by management followed by a question and answer session.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, August 4, 2009. The Company undertakes no obligation to revise our publicly release the results of any revisions to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission regarding this reporting period.

Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned to not place undue reliance on any forward-looking statement.

And with that, I would like to turn the call over to Bruce Mackey.

Thanks, Tim. And thanks everyone for joining us this afternoon. In addition to our second quarter news release issued after market today, I would like to point out that we issued an additional release announcing an accommodation lease realignment agreement with Senior Housing Properties Trust, or Senior Housing that assists Senior Housing in obtaining mortgage financing from Fannie Mae. I will discuss this in more detail in a moment after reviewing the second quarter results.

For the three months ended June 30, 2009, net income from continuing operations was $0.28 per basic share and $0.26 per diluted share compared to net income of $0.14 per basic share and $0.13 per diluted share respectively for the same period last year. However, both the second quarter of 2009 and 2008 included unusual items.

The 2009 results include several items that in aggregate resulted in a positive impact of $6.4 million or $0.20 per basic share and $0.17 per diluted share respectively. These items included a $6.1 million gain to early extinguishment of debt, $195,000 unrealized gain on our holding of auction rate securities, and a $239,000 unrealized gain on our UBS put right related to our auction rate securities.

The second quarter of 2008 included a $1.1 million unrealized loss or $0.03 per basic and diluted share respectively on our holdings of auction rate securities. Excluding these items, net income from continuing operations per diluted share was $0.08 in the second quarter of 2009 versus $0.16 in 2008.

The primary reason for the decline in this quarter's net income from continuing operations is our decline in occupancy. Occupancy for the second quarter of 2009 was 86.0% compared with 86.5% a quarter ago. Same store occupancy for the second quarter of 2009 was 86.9% compared with 87.5% a quarter ago.

Same store occupancy as of this past Friday has actually increased by 30 basis points to 87.2%. While occupancy was down for the second quarter, we were still able to control costs and push rates. Our average daily rate increased 50 basis points year-over-year overall and 3.2% on a same store basis.

On average, Five Star's increased its same store average daily rate by over 3% over the last six quarters. However, the occupancy downturn our industry has faced over the past two years has started to impact our ability to push rates. In many markets where we operate, other operators are significantly slashing prices.

Occupancy is still the key here. The occupancy drops that we and the industry have experienced in the past two years appear to be stabilizing and it is encouraging to see small signs of life in the residential housing market.

Looking at Five Star's offering by product type, I think that we are more than holding our own on assisted living and Alzheimer's. There are some challenges in skilled nursing, but our greatest challenges lie with independent living. Rate cutting in independent living is pervasive and for the first time we too have begun to cut rates.

We are only doing this in 24 buildings with independent living units that have been vacant for some time. We rolled out the program on July 15 for just over 100 units, and as of last Friday we already have deposits on almost 70% of these units.

Moving on to other metrics. Wages and benefits as a percent of senior living revenues were 51.3% in the second quarter up from 48.9% a year ago and 50.8% during the last quarter. This increase is primarily related to significant increases in our healthcare insurance costs, which Fran will describe in more detail in a few moments. Going forward, it is our goal to keep this ratio below 51%.

G&A as a percent of revenues was 4.4% as we still maintain the leanest operations in the industry. We expect this percentage to be in a similar range throughout 2009.

In spite of the difficult economic conditions, our core senior living business remains profitable. Nearly 85% of our total company revenues come from this business. Approximately 70% of our senior living revenues are coming from private pay sources. In the second quarter of 2009, Five Star senior living produced $21.3 million of EBITDAM compared to $21.1 million for the first quarter.

Our ancillary businesses, which make up only 15% of our revenues, continued to struggle in the second quarter but did show improvement from the first quarter of 2009.

The rehabilitation hospitals, which account for 9% of our total revenues, made $100,000 of EBITDAM during the second quarter. This was an improvement of approximately $1.1 million in EBITDAM on a sequential basis. About $750,000 of this improvement in quarter-over-quarter EBITDAM relates to prior periods, but we are making some headway turning these operations around.

We opened our new wing at Braintree Rehabilitation Hospital in June and the community response has been great. We are working on the next wing at Braintree right now. Our second wing at New England Rehabilitation Hospital is scheduled to be completed in late August. We are also continuing to work on building new programs at both hospitals that will help us draw CMS compliant patients away from our competition, consolidate operations to improve our operating margins, as well as opening new in-patient satellite clinics at third-party host hospitals.

The pharmacy operations, which make up 6% of our total revenues, were breakeven on an EBITDAM basis during the second quarter. This was an improvement of approximately $100,000 in EBITDAM on a sequential basis.

As of the end of June, we were currently servicing approximately 11,800 customers and have expectations to add almost 900 customers during the next several quarters. Half of those customer additions will be Five Star residents.

I would like to note that during the second quarter we repurchased $12.8 million of convertible senior notes for $6.3 million. We have $67.2 million of convertible senior notes currently left that could be put to us in October 2013.

As was the case over the past few quarters, the board and management believe this repurchase to be a good use of capital. It delevers our balance sheet and provides a high return to Five Star and its shareholders. I think it once again underscores the board's confidence in Five Star's long-term prospects.

I would now like to discuss the lease realignment agreement with Senior Housing. As part of this agreement, Five Star's receiving a $2 million annual rent reduction on a lease that now includes our two rehabilitation hospitals. In addition, Five Star is receiving a one-time payment of $18.6 million. Plus Senior Housing will cover Five Star's out-of-pocket expenses related to closing this transaction. Senior Housing in turn will receive $3.2 million newly issued Five Star common shares.

In consideration to the above, Five Star is allowing substantially all of the tangible and intangible personal property located at or arising from the operations of the mortgage properties to be pledged to secure the loan.

What does this really mean? First, Five Star is giving up excess collateral that backs our $40 million revolving credit facility with Wachovia. Prior to this agreement with Senior Housing, our $40 million credit facility was over secured by about $10 million of eligible receivables. Today our $40 million credit facility is over secured by about $4 million of eligible receivables.

Second, about $8.7 million of net property and equipment were sold to senior housing. However, Five Star's residents and employees still retain full use of this property and equipment at no addition costs. And third, we have consented to the lease realignment required for Senior Housing to close the Fannie Mae financing. We will also be responsible for some additional reporting to Fannie Mae that may require us to add additional personnel in our corporate office.

However, another way to look at this transaction is to look at what Five Star really received versus what we gave up. We received $18.6 million and got a $2 million rent reduction for the remaining term of the lease equating to 17 years. What did we really give up? Just the 3.2 million shares issued to Senior Housing.

If you compute our present value calculation on a $2 million rent reduction over the remaining term of the lease using a 5% discount rate, you get $22.5 million, and adding the $18.6 million payment, you arrive at approximately $41 million. Effectively, we sold 3.2 million shares of Five Star common stock to Senior Housing for $41 million or almost $13 per share.

Let me point out that this transaction accomplishes two other things. First, it helps accelerate profitability at the rehabilitation hospitals. And second, to the extent that Senior Housing invests some of the $500 million in the senior living space, Five Star may stand to benefit.

In summary, taking into account the additional shares, we expect that this transaction on an annual basis will be $0.08 per share accretive to annual diluted income from continuing operations.

Before I turn the call over to Fran, I would like to remind you of the way that Five Star has positioned itself to withstand this prolonged economic downturn. Five Star has no near-term debt maturities for our senior notes or mortgages. The closest maturity we face is in October 2013 when our senior notes can be put to us.

In November 2008, we reached a settlement with UBS concerning our auction rate securities. We have a put right to UBS to sell the securities at their par value of approximately $75 million in June 2010.

In December 2008, we extended our $40 million credit facility with Wachovia until May 2010. We own 22 unencumbered communities with a current net book value of approximately $126 million. Our communities require no entrance fees. This gives potential residents much more financial flexibility in this trying economy.

The accommodation agreement with Senior Housing is a significant additional positive. We reduced our annual rent payments on the rehabilitation hospitals by $2 million and received $18.6 million of cash. And in my mind, our biggest advantage may be our cost control culture. As a company, we were born out of adversity losing money for our first few years of existence. Controlling costs helped us to move to profitability in 2004.

At this point, I would like to turn the time over to Fran Murphy, our Chief Financial Officer.

Thank you, Bruce. Good afternoon everyone. For the second quarter, our senior living revenues increased $25.4 million or 11% to $253.2 million compared with the seconded quarter of 2008. Revenues from communities acquired or leased after April 1, 2008 our new communities accounted for most of this change or a total of $20.1 million. A 2.3% increase in same store senior living revenues accounted for the rest of the increase rising on a 3.2% increase in average daily rates offset by a 170 basis point decline in occupancy.

Senior living operating expenses increased $20.4 million or 12% to $190.1 million compared with last year. Again, most of this increase or $15.1 million was from our new communities. Higher same store operating expense, especially health insurance costs, explains the remaining increase rising 3.1% from prior year levels to $175 million.

Our health insurance costs increased $3.3 million or 36% during the quarter from the first quarter of 2009. In reviewing our medical costs for the quarter, we found that two-thirds of the increase was due to an unusually large number of health claims exceeding $50,000.

We believe that discretionary spending on elective procedures has jumped in 2009 because of employees' concerns about the economy, job market and uncertainty about proposed changes to the healthcare system. These costs should decline to normal lower levels during the coming months.

Encouragingly, we have seen a greater utilization of preventive care among our employees with our adoption last year of a consumer driven health plan. In the coming plan year commencing in October, we will lower our health plan administration costs by roughly $2.5 million annually offsetting an expected 10% rise in health claim costs belated to medical inflation.

For the second quarter of 2009, our same store operating margins before rent or EBITDARM as a percentage of revenues declined to 24.9% from 25.5% in 2008, due largely to the affect of lower occupancy on our labor efficiencies. EBITDARM in our new communities was $5 million or 24.9% of revenues, as well.

Operating results for the second quarter at our ancillary businesses showed positive results at our rehabilitation hospitals, while the pharmacy business was essentially breakeven.

Rehabilitation hospital revenues were up $1.3 million or 5.1% during the quarter, due mainly to increased low income patient adjustments from Medicare partially offset by lower occupancy. Hospital expenses increased 0.6% during the quarter due to strong cost management. And rent was up 5.9% due to additional sales of hospital CapEx to senior housing.

Our institutional pharmacy revenues were flat compared to last year, as the impact of adding new customers was offset by a decrease in Medicare Part A population and lower average revenue per script. Pharmacy expenses increased 5.4% from the prior year because of higher labor costs needed to service our rising customer base, including the cost of staffing two satellite pharmacies opened earlier this year. Pharmacy operations were breakeven on an EBITDARM basis during the quarter.

During the second quarter, general and administrative expenses increased 11% or $1.3 million from last year due to the addition of staff and other costs necessary to support our new communities. Our G&A costs as a percentage of revenues remain virtually unchanged from last year.

Rent expense increased $5.4 million or 14% compared to last year. Most of this increase or $3.9 million was due to rent at our new communities, while the remainder was from additional rent due to sales of CapEx for Senior Housing and percentage rent increases.

Taxes were $1 million in the second quarter, including $260,000 of taxes on gains from our purchase of convertible notes. Additionally, state tax true-ups for 2008 resulted in another $255,000 of expenses during the quarter. Absent any unusual gains or losses, we expect taxes for the remainder of the year to be $1.2 million.

Before concluding today, let's review our balance sheet, cash flows and liquidity. At June 30, we had unrestricted cash and cash equivalents of $21.7 million. Our total current unrestricted cash and investments, including our UBS put right and auction rate securities, were $104.1 million. At June 30 and as of today, we had nothing drawn on our $40 million revolving line of credit with Wachovia and $39.9 million outstanding on our $40 million line with UBS.

I should mention that during the second quarter our balance sheet classification for our auction rate securities, UBS put rights and UBS credit line was changed from long-term to current because of our right and intent to exercise our put right with UBS and sell our auction rate securities at par on June 30, 2010.

Consolidated EBITDA, excluding certain items noted in our press release, was $8.2 million during the quarter compared with $9.8 million last year. Operating cash flows for the second quarter were $0.5 million consistent with those of the second quarter of 2008, both negatively affected in comparison to the first quarter results, primarily due to the timing of vendor payments.

We made $12.2 million of capital investments during the period and sold $11.5 million of CapEx to Senior Housing. We anticipate recovering another $4.6 million in future sales of CapEx to Senior Housing for expenditures made by Five Star through June 30.

Our accounts receivable management remained strong as a number of day sales outstanding at June 30, including the hospital and pharmacy operations, was an exceptional 20.9 days, our lowest level in a year.

At the end of the second quarter we had $189.2 million in net property and equipment, which included 25 properties that are directly owned by Five Star, 22 of which are unencumbered by debt. In addition to the lines of credit mentioned previously, we had $67.2 million of convertible senior notes and $12.5 million of HUD mortgages outstanding. We believe we are in compliance with all material terms of our credit, note and mortgage agreements.

Before closing today, let me say that during this period of declining occupancies precipitated by plunging home prices and employment levels, Five Star continues to be profitable because of key strategic decisions we made. We continued to acquire senior living communities, to defend and to raise our senior living rental rates, and to enhance our cost control culture through strong operational leadership.

We have repaired and fortified our foundations as we continue to invest significantly in our residential assets at a time when many of our peers are unwilling or unable to do so. We have also improved our financial wellbeing by purchasing significant amounts of our debt at steep discounts to par value, resolving our auction rate securities investment, and during the past quarter we recouped over $3 million of losses in our investment portfolio.

Our accommodation today with senior housing serves only to make us even stronger. In the coming months and quarters, the surest way for us to continue our success is to focus on raising census at our existing communities and by growing our senior living business through acquisitions. With these efforts, Five Star finds itself securely positioned for future growth and performance in a very compelling industry.

That concludes our prepared remarks. We'll now take your questions.

(Operator Instructions). Our first question comes from Jerry Doctrow with Stifel Nicolaus.

Hello. Let's see, a handful of things some little and some sort of bigger. Just, Fran, I think you mentioned this but I missed it. With just the amount that S&H reimbursed you in the quarter for CapEx.

It was $11.5 million, Jerry.

Okay, thanks. And then was there additional money that you spent on your own maintenance CapEx in the quarter?

Well, we're always spending money on our own CapEx.

Basically, was there any -- was the $11.5 million was there a total CapEx spending in the quarter or you had stuff that you went out-of-pocket for, as well?

We always have a balance of CapEx available to sell to Senior Housing going forward. We took that balance down a little bit, so in the quarter we spent $12.2 million and we were reimbursed $11.5 million.

Okay, great. Thanks. And I guess on the expense side, you cited sort of the -- Brookdale reported last night, this morning actually did a very nice job on margins. So I was trying to sort out, I guess, beyond the big jump in sort of healthcare spending. Would margins have been better or where would your kind of wage costs have been? Was that kind of the issue and were the expenses kind of under control or other issues there, as well?

Jerry, it's Bruce. For the most part, expenses were under control. We've done a very good job managing our labor overall. If we look at some of our stats that we track on a regular basis, labor as a percentage of revenues without benefits wasn't at an all-time low, but it was close to it.

Overtime and third-party agency costs were at all-time lows. We've done a very good job managing those costs. But health insurance really ticked up significantly in the quarter. Like Fran said, we looked at about a 35% increase ballpark $3.3 million. That was significantly more than we had anticipated and we do expect that to be going down in the future.

And just in terms of thinking about it like for your next quarter, does all of that go away or any sense of sort of where we should be thinking about it for next quarter?

I don't think it all goes away, but I'd say a fair amount of it does go away. We would expect -- assuming we're not growing, the only thing that should be going on there is medical inflation, which for the last I'd say two years is right around 7%, 8%. So you're looking at maybe a 2% bump per quarter versus our 35% bump this quarter.

Okay. And so we should bump off that much increased base or we should go back to kind of first quarter and say this is a one-time aberration and you should be back on a --

Yes, over first quarter we're probably up 4% or 5% with two quarters of medical inflation.

Okay. All right. That's helpful. And I'm kind of very positive on the alignment and the fact that you got money. I think I'm sort of puzzled about or trying to sort out is kind of it got complicated by throwing in the stock sale to S&H.

What's the price of the actual stock sale because clearly there were other things? I mean, you described it as sort of getting whatever it was $13 or $14 or something for the stock, but clearly they were paying you for all this other stuff that you were doing, as well. So what's the price on the stock that was sold?

Yes, I agree. I think how we book-keep this and reality can be two different things. From an accounting point of view, and we haven't finalized this or even really started to finalize it yet, but essentially we got $18.6 million. We sold $8.7 million of FF&E.

We'll probably book-keep the stock at today's closing price and there'll be some excess that will amortize over the life of the loan, and then we'll take the rent reduction on an annual basis for the next 17 years. But I do need to take a look at it and there was significant give and take between the two boards, as really the independent directors of the two boards, and stock did come into play.

So basically the $18 point million whatever $18.6 million is it or $18 point million that they paid you, you're saying that the value of the assets that they got was like $8.7 million and then there was, obviously, some additional payment just for your wear and tear in putting up with the aggravation of the Fannie Mae reporting requirements and that sort of stuff. And so there's some price -- but essentially everything above the $8.7 million you think is going to be imputed as sort of price of those shares, is that?

Right, but even the $8.7 million I think you still have to look at and take that into consideration somehow. Nothing changes at our buildings. The residents still use the couch, they still consider it their couches, etc. That just moved off of our books onto Senior Housing's book and we don't pay anything additional for it.

I guess what I'm trying to think through and, again, there's a number of moving pieces here, if I'm a shareholder of your stock today with it wherever we closed $2.80, tomorrow the benefit -- once the news of the $2 million rent reduction is public, presumably the share price would jump because your income clearly is going to go up. And so you made a decision to sell stock to S&H kind of before that information's public the share price is going to be higher today.

So if I'm a shareholder, why should I feel good about the sale to S&H today rather than waiting until that was public maybe even offering shares to the public? That's what I'm trying to kind of think through. Does that make sense?

It does, but I still point back to the fact that you've got to take into account the full cash picture. We greatly enhanced our liquidity position, gave up next to nothing for it, and reduced our rent by $2 million.

Right, and the only thing I'm struggling with, and maybe there's not an answer right now, is it would be much clearer to see that benefit but for the shares. I think that --

I don't disagree with that point, Jerry. That's fair, but even taking into account the dilution on the shares and the rent reduction and other things, we still believe this will be $0.08 accretive to Five Star shareholders, again with that extra share count to Senior Housing.

Okay. And why did S&H even want the shares? That was just sort of -- they were bidding the upside. I mean, I'm just trying to understand the rationale.

That's the big thing they wanted to participate in the upside. I mean, we start off negotiating without the shares, then they wanted the stock and that pushed the price of the deal.

Okay. All right, and in terms of just putting a particular price on the stock, though, that's not something you want to do at this point.

Well, we'll book-keep it at today's close and that's how it will happen.

Okay. All right, thanks.

Okay, thank you, Jerry.

(Operator Instructions). We'll go next to Michael Demaray with Elevated Capital.

Good afternoon gentlemen. Congratulations on managing through a difficult environment here. I for one want to say that I appreciate the sale of shares above today's share price, so I certainly would not want to see you guys issuing equity at today's share price. I think the shares are undervalued.

So my question for you is, if you're starting to see troughing and bottoming, can you talk to us about the decision of repurchasing shares versus repurchasing the debt? It seems to me that the shares are the more undervalued security here.

Michael, potentially I think that's probably the case. I think our board long-term is still concerned about the converts that we put to us in October 2013, so I think they'll want to make sure that those are well covered before we take a serious look at any share repurchase.

Okay. I guess, you guys do have, obviously, the Wachovia line and then also the spread between what's outstanding with UBS and then what you're going to get back from them in June. So I would just maybe if you guys have any room there or even from the cash that you guys just got if you would think about that that would be great, I think.

Michael, I can appreciate that and I will tell you our board does look at that and evaluate it on a fairly regular basis. I think one thing that we'd like to get over and maybe we're starting to work on that a little bit right now, is we've got about a month spread between when our line expires with Wachovia and to when we get the auction rate securities from UBS. But, again, I understand the point and I think it's a valid point.

Thanks guys. I appreciate it.

Thank you, Michael.

And it appears we have no further questions. At this time, I would like to turn it back over to Mr. Bruce Mackey for any additional or closing remarks.

Great. Well, thank you for joining us on today's call and we look forward to updating you on our progress in the future.

And that concludes today's conference. Thank you for your participation.