Alerislife Inc (ALR) 2010 Q1 法說會逐字稿

Good day, and welcome to the Five Star Quality Care first quarter 2010 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 Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining me on today's call are Bruce Mackey, Five Star's President and CEO, and Paul Hoagland, Five Star's CFO. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would also note that the recording and retransmission of today's call is strictly prohibited without prior written consent of Five Star.

Before I begin today's call I would like to state 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, May 3, 2010. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission, or SEC, regarding this reporting period.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I would like to turn the call over to Bruce Mackey.

Thanks, Tim, and thanks, everyone, for joining us this afternoon. Just after market closed, we reported net income from continuing operations of $0.12 per basic and diluted share for the three months ending March 31, 2010, compared with net income from continuing operations from $0.78 from basic share and $0.67 per diluted share respectively for the same period last year. While we are very pleased with most of our first quarter results, we did get some benefit from some one time expense adjustments that went in our favor this quarter.

First we had a positive pickup in employee benefits of $1.6 million. This was mostly related to favorable trends in employee health insurance. This amount was offset by a $400,000 charge to operating expenses related to wide area network charges in 2009 that were expensed in 2010. All told, these items positively impacted our results by approximately $0.03 in the first quarter of 2010. As a reminder, the first quarter of 2009 included unusual items. The 2009 results included several items that, in aggregate, resulted in a positive impact of $22.2 million or $0.69 per basic share and $0.60per diluted share respectively. Excluding these items, net income from continuing operations per diluted share was $0.09 in the fourth -- first quarter of 2009.

I would like to point out to those looking at our news release, you will see for the first time we have broken out our skilled nursing data from independent and assisted data on the basis of revenues, wages and benefits, operating expenses, occupancy and average daily rate or ADR. We hope this additional level of granularity will give analysts and investors better insight into the strength of our core operations.

I am all pleased to report continued signs of stabilization in our occupancy. Occupancy for the first quarter of 2010 was 86.2%, compared with 86.1% a quarter ago and 86.7% a year ago. Same store occupancy for the first quarter 2010 was 86.1%, compared with 86.7% a year ago. Occupancy as of this past Friday remains at 86.2%. For those of you who listened to the call to the NIC call last week, these occupancy results compare favorable to NIC's overall industry results. Our occupancy has moved up from third and fourth quarter levels, which is particularly gratifying, given that Q1 is historically a weak quarter. For the first time in a number of years, the effect of the flu season has been muted, thanks in no small part to the focus the population at large had on preventing the spread of the H1N1 flu.

We are also continuing to see increased traffic to our buildings. By utilizing the [leads] tracking system we put into place in late 2008, we can see that inquiries continue to trend in a positive direction. For example, our inquiries in the first quarter 2010 increased about 2.5% over the first quarter of 2009. Our inquiries are all up about 12.5% over the fourth quarter of 2009.

Our website traffic also can use a trend in the right direction. An interesting point of note is 17% of our inquiries are now coming from the Internet. This increased traffic is leading to increased deposits. In the first quarter of 2010 we averaged 330 deposits per month. and we took on 339 more deposits in total than in the fourth quarter of 2009.

We have continued to do a good job of pushing rates where possible. Our average daily rate increased 2.8% year-over-year overall, and more importantly 2.9% on a same store basis. These are 90 and 60 basis increases respectively over the fourth quarter.

With the improving signs in the economy and the continued apparent stabilization in our occupancy, we are trying to find the right balance in regards to discounting rates. As reported on the last few calls, we've been selectively discounting some of our tougher-to-rent units, primarily our independent living units. Some of this discounting has obviously positively impacted our first quarter results in our deposits. We're hopeful that we will be able pare back this discounting during the remainder of 2010. Overall we still expect our private pay rates to increase in 2010 between 3% and 4%.

Moving on to other metrics. Wages and benefits as a percent of sales and revenues were 50.2% in the first quarter, down from 50.7% a year ago and down materially from the 51.7% we reported in the last quarter. This is an area where we've historically performed well in, and we have shown that this quarter. G&A as a percent of revenues was 4.2%, as we still maintained the leanest operations in the industry. Our stated goal was to keep this figure around 4.5% of revenues.

Our core Senior Living business continues to be profitable. More than 85% of our total Company revenues comes from this business. 70% of our Senior Living revenues are coming from private pay sources. In the first quarter of 2010, Five Star Senior Living produced $22.7 million of EBITDAM, compared to $21.2 million of EBITDAM for the first quarter of 2009. More significantly, Five Star Senior Living produced 20% more EBITDAM in the first quarter of 2010 compared to $18.3 million produced in the fourth quarter of 2009.

The Rehabilitation Hospitals, which account for 8% of our total revenues, were clearly a disappointment in the first quarter, as they lost about $1 million of EBITDAM. This step back from the fourth quarter of 2009 occurred due to a drop in patient census. The drop in census was related to two areas. First, some of our referring hospitals had a very weak census, which caused their referrals to us to go down. The second reason is a new Medicare regulation that went into effect in the first quarter. As of January 1st, all patients submitted to the hospitals must now be able to tolerate three hours of therapy per day, beginning with the day of admission. A hospital physician must certify this in writing prior to the patient being admitted. Historically, the hospitals were allowed to admit patients with the potential to tolerate three hours of therapy a day and a physician certification was not required.

On the positive side, we continue to make some progress with our additional inpatient satellite unit, as well as our additional traumatic brain injury unit. I will admit the progress has been far slower than I would have anticipated. It is our belief, however, that these two units will be operational within the next year and will help bring this segment to profitability. In March, our Braintree Hospital became the on gold certified facility in New England with Disease-Specific Certification in traumatic brain injury. Braintree is still the only gold certified facility in New England with Disease-Specific Certification in stroke.

The Pharmacy operations, which make up 6% of our total revenues, made $555,000 on an EBITDAM basis during the first quarter. As of the end of March, we are currently servicing 12,350 customers and have expectations to add over 1,000 additional customers during the next several quarters. The majority of those customer additions will be third party customers.

The senior-living acquisition front for us has been very slow. We did not close on any transactions in the first quarter and are not forecasting anything of note for the second quarter. We are looking at a few listings, but most, if not all, are one-off transactions primarily from single owner operators.

We were pleased in the first quarter to have entered into our new three-year $35 million revolving credit facility with Jefferies and Company. While the terms are not as attractive as our old Wachovia line, given current credit market conditions, we are happy to have this line -- this new line with these terms. It is a very good sign of Five Star's long-term growth prospects.

As occupancy continues to improve, our financial -- our strong financial position should allow us to continue prudent bottom line growth. As a reminder, Five Star ended the quarter with $18.6 million of cash. At quarter end, Five Star had an untapped line of credit with Jefferies for $35 million. Five Star has a put right to sell approximately $68.4 million of auction rate securities to UBS in June 2010, from which we will net $31.2 million of additional cash after paying off the credit facility we have with UBS. Five Star has no near-term debt maturities for our senior notes or mortgages. We have $49.7 million of convertible senior notes currently left that can be put to us in October 2013. And last, we own 25 communities that we operate, 22 of these communities are unencumbered and have a net book value of approximately $129 million.

Our four keys to success remain the same. Increase occupancy and average daily rate, while holding labor and G&A costs in check. Throughout the past year we have performed consistently on the last three. On last quarter's call I said that we were redoubling our efforts on these items to see if we could do better as occupancy starts to pick up. These efforts were certainly contributing factors to our solid quarter. I think Paul and his team are doing a great job finding additional opportunities on the cost side, and our executive directors and marketing staff made more effective use of the tools we have given them over the past several quarters to help stabilize our occupancy and control our costs. At this point I would like to turn the time over to Paul Hoagland, Our Chief Financial officer

Thank you, Bruce, and good afternoon everyone. For the first quarter our Senior Living revenues increased $15.8 million, or 6.3%, to $266 million, as compared to the first quarter of 2009. This increase was due primarily to revenues from 11 communities who began to operate during the fourth quarter of 2009, which had revenues of $11 million. Plus, an increase in our same store comparable communities of $4.8 million or 1.9%. Driven by a 2.9% increase in rates, offset by 0.06% increase -- decrease in occupancy.

Senior Living operating expenses increased $10.7 million, or 5.7%, to $199.2 million, compared with last year. Again, most of this increase, or $8 million, was from our new communities. The Senior Living wages and benefit costs from our comparable communities decreased as a percentage of revenues from 50.7% to 50.2%,primarily due to improved labor controls and slightly favorable benefit costs. Our Senior Living operating costs at comparable communities were up by ten basis points primarily due to increases in food and other purchase service expenses.

Now, turning to our other ancillary businesses, the Rehabilitation Hospitals generated a first quarter EBITDAM loss of $1 million. Hospital revenues were down $642,000, or 2.6% compared to last year, due mainly to a decrease in occupancy, which decreased from 62.2% to 54.7%, and lower Medicare patient days. Hospital expenses as a percentage of revenues increased by 150 basis points during the quarter, primarily due to increases in labor and benefit expense driven from a decrease in occupancy.

Our Pharmacy operations achieved a $555,000 margin in the quarter, which is an increase of $663,000 from the prior year. Pharmacy revenues were up 7.2%, or $1.3 million when compared to the previous year. Due to the impact of adding new customers, which was partially offset by average revenues per prescription due to higher sales of generic drugs, total pharmacy expenses increased by only 3.5% from the prior year due to higher costs associated with our rising customer base, but our revenue increase allowed us to capture an efficient EBITDAM flow through.

During the first quarter, general and administrative expenses increased $705,000, or 5.6% from last year, due to higher corporate and regional [support] costs primarily associated with the new communities that we began to operate during the fourth quarter 2009. Our G&A costs as a percentage of revenues are in line with last year at 4.2% and are within range of our expectations. Rent expense increased $3.3 million, or 7.4% compared to last year, with most of the increase being due to new acquisitions, which had rent expense of $2.6 million. Income taxes were $493,000 for the first quarter, and absent any unusual gains and losses next quarter, we expect taxes to be approximately the same, or $500,000 in the second quarter.

Before concluding today, let me review our liquidity, cash flow and selected balance sheet items. At March 31st, we had unrestricted cash and cash equivalents of $18.6 million, and we had total unrestricted cash and investments, including our net UBS put right and auction rate securities, of $59.9 million. As of March 31st, we had nothing drawn on our $35 million revolving line of credit with Jefferies, and $36.3 million drawn on our line with UBS. Today our balances remain undrawn at Jefferies and Company and are at $33.2 million at UBS, thereby netting us approximately $35.1 million of ARS proceeds today.

Consolidated EBITDA, excluding certain items noted in our press release, was $9 million during the quarter, as compared to $7.6 million in the previous year. Operating cash flow for the first quarter was $15.5 million due to operating performance, the receipt of $6.1 million of auction rate securities redeemed in par, and favorable working capital. We made $12.1 million of capital investments during the quarter, and sold $6.2 million of CapEx to Senior Housing.

Our accounts receivable management remains strong as the number of days sales outstanding for our consolidated operations was 20.1 at March 31st, The lowest we have achieved in the past few years. At the end of the first quarter, we had $194.7 million of 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 debt on our UBS line of credit previously mentioned, we had $49.7 million of convertible senior notes and $12.2 million of HUD mortgages outstanding. We believe we are in compliance with all material terms of our credit, note and mortgage agreements.

In conclusion, we continued to experience headwinds with regards to occupancy challenges, which we and the industry are facing. However, with our continual efforts to improve operations and resident satisfaction, along with more resources to increase our marketing and awareness, we are confident of our abilities to grow census. In addition our --

Ladies and gentlemen, please stand by. One moment, ladies and gentlemen. Please stand by.

We understand that the call was interrupted at the end. We appreciate your patience in waiting, but we'd now like to open it up for questions for Bruce Mackey and myself.

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions.) We'll take our first question from Kevin Ellich with RBC Capital Markets.

Good afternoon, guys. Thanks for taking my questions. Bruce, I guess starting off with, why did you guys decide to break out the skilled nursing segment, and are you gonna continue to report that?

We will continue to report that going forward. It's something that investors have asked us for over the time. And Paul's looked into it and realized it was fairly simple to do. That's why we did it.

It's not any indication that you're looking or thinking about doing something strategic on that front, is it?

No, it is not.

Okay.

Again, I think it's more just a response to investor questions over the I'd say last several quarters.

Okay. And if I did the math right, it looks like the operating income in the [SNITH] segment was actually down about 6 -- little bit over 6.4% on an annual basis. What's behind that? Is it just reimbursement from Medicare?

That's the biggest thing. Then Medicaid as well. We've been hitting a few states, California pretty hard, Wisconsin.

Okay, okay. And then going back to the average daily rate, all-in was a little bit lower than we were expecting. But you said for the full year, you expect private pay rates to be up 3% to 4%. Do you plan on pushing that through over the next couple quarters, or when should we see that?

I think you're seeing it right now. I know we said in the first quarter I was 2.8% or 2.9%. That's our independent senior-living communities, which doesn't include our CCRCs. And some of that is skilled nursing and Medicare, which saw a rate decrease, as you know. Our private pay rates right now are in the 3% to 4% range.

What type of rating -- I guess taking a close look, but what's Medicaid doing these days? Is it going down?

It's, I'd say flat probably across all states or close to it. Some states it is going down. Other states -- I have seen very few states with increases in all honestly. Most are flat or slight decreases. California we've seen substantial decreases.

Okay. Then on the rehab hospitals, will you -- do you expect to continue to see the same impact that you saw this quarter due to the change in Medicare regulations?

That regulation, yes, that will go forward for some time. Now, the first quarter, that was a rough quarter for us last year as well. We did improve operations throughout 2009. So that will probably trend a little bit from the referring hospitals; [they're] centers did get better over the remainder of 2009. So I would expect to see some of that trend in 2010 for us. But that new Medicare regulation I did just talk about will go -- that will be recurring.

I see. Do you guys -- does your business see impact from inclement weather, bad weather? Obviously for the residents living there, I'm assuming nothing, but do you think that has any impact?

You're referring to the Senior Living business?

Yes.

Sure it does. You're right, not for the residents actually living there. However, our operating costs do go up in times like that. We've got increased utilities for the colder weather, snow removal costs. What we saw this year, we really saw a significant storms in the Mid-Atlantic and areas like Nebraska and things like that, where they were getting 15, 20 inches of snow. We saw a lot -- overtime kick up, where employees didn't get to work. So we saw a lot of higher overtime than we've seen in past years.

Okay --

(Inaudible - multiple speakers) I do want to talk about the Senior Living business. One of the things you do see, if it's snowing out, people aren't going to look to see if they can get mom in a place for AL or IL. You do see that go down as well when the bad weather hits.

Do you think that's why you've seen the increase in -- I guess increase from the Internet I think you said 70% now?

17%. 1-7.

Okay. Sorry.

No, I really don't think weather's driving that. I think that's where this industry's going.

Okay. And then lastly, I think you said you had the put option to UBS. That's coming up in June.

Yes.

And your net, is it net $32 million, is that it?

Well, at the end of the quarter it was net $32 million. As of today it's net $35 million.

35?

Yes.

So have you -- do you have plans, or I guess, what do you guys plan to do with your capital and your free cash flow? And actually, did you guys give us the operating cash and CapEx?

Yes, Paul did in his prepared remarks. I don't know if you want us to give it to you again.

Yes, we -- for the quarter we spent a little bit over $12 million, and then we sold back $6 million.

Sold back 6. And then what was operating cash?

Operating cash was $15 million?

$15 million?Okay. And then priorities for the use of the cash? And [again] when you get that $35 million in June?

I wouldn't say we have any set plans as of right now. We continue to look at favorable opportunities for our convertible debt. We obviously didn't take advantage of that in 2010 so far, but we still continue to look. We look at properties to some extent. I think that was probably the first two priorities, given that -- again, we look at properties a little bit like putting money in the bank for us, because we do have to pay that convertible debt down in 2013. If we're not buying the debt itself, we have to keep in mind that we'll be paying that in three years.

Okay. Got it. Okay. Thanks, guys

Great. Thank you, Kevin.

(Operator Instructions). We'll take our next question from Joel Ray with Davenport.

Good afternoon, folks.

Good afternoon, Joel.

A few questions for you. Could you go and outline for us if we were to exclude the benefits that we had, that you had mentioned were one time or about $0.03, would that apply to your wage costs?

Yes.

Meaning, what would the -- what would your ratio, operating expense ratio for wages be X that?

Well, we finished the quarter at 50.2%. Potentially you'd be looking at another 2 to 3 tenths. But I think one thing I would caution the audience on with regards to the health benefits is that, as we spoke in the fourth quarter, we did see some softening from a standpoint of the trend in trajectory the Company was on, which obviously was accelerated health care costs in 2009. But the fourth quarter we saw some softening. It continues into the first quarter. Certainly, last quarter was a partial quarter. This was a full quarter. But for us to be able to forecast with any certainty going forward what that will look like would be impossible. But again, we're cautiously optimistic that we're seeing a softening in that health care expense. And again, as we look at those numbers in the first quarter, we've tried to isolate what we thought was the positive impact.

Okay. And in addition to that, I have seen that you have a little bit of variability from quarter to quarter on your, quote, other operating expenses. What were involved here that might have driven those up a bit into the first quarter? Was there anything unusual?

Joel, I wouldn't say there was anything unusual. I know Paul in his remarks talked about some food costs being up.

Okay.

And that was Q1 2009 and Q1 2010. I'm not sure if you're talking about that or if you're talking about Q4.

Again, it has bounced around from quarter to quarter. It was a bit higher in the first quarter of 2010 than I thought it might be. I just didn't know if there was anything that I should be thinking about there.

I think the biggest variable in that quarter -- usually the utilities, and then I know Kevin Ellich talked about the other -- some of [that we] saw, some of that effect of the snow removal costs. But I don't think there's anything really big that moved around.

No. I mean, it was a reduction from the fourth quarter of 2009 by approximately 30 basis points. And it's, again, about 10 basis points higher than previous years. There was no one item. Food made a little bit of movement. It was by 1/10 of a point.

Certainly, the results are encouraging, so congratulations.

Great. Thank you, Joel. Appreciate it.

And with no further questions in the queue, I would like to turn the conference back to Bruce Mackey for any additional or closing remarks.

Great, thank you. And thank you all for joining us on today's call. We expect to be out on the road meeting with investors in June, and hope to see many of you then or our Q2 conference call in early August.

This does conclude today's conference. We thank you for your participation.