Alerislife Inc (ALR) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Five Star Quality Care third quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Five Star's 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 conference call is strictly prohibited without prior written consent of Five Star.

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, October 27th, 2010. The company undertakes no obligation to revise or publicly release the result of any revisions of 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 to not place undo reliance upon any forward-looking statements. And now I would like to turn the call over to Bruce Mackey.

Great, thanks, Tim, and thanks to everyone for joining us this afternoon. Just after market close we reported net income from continuing operations of $0.16 per basic share and $0.15 per diluted share for the three months ended September 30th, 2010. This compares with $0.13 per basic and diluted share that we reported for the same period a year ago. However, income from continuing operations for the third quarter of 2009 included several items that in aggregate resulted in a positive impact of $0.12 per basic share and $0.10 per diluted share respectively. Paul will review those one-time items that occurred during 2009 in his prepared remarks.

So, excluding non-recurring items, third quarter 2010 income from continuing operations was $0.16 per basic share and $0.15 per diluted share which was a substantial increase over third quarter 2009 income from continuing operations of $0.01 per basic and diluted shares. As I stated last quarter, I think we stand together with our peers in looking for an up turn in occupancy. It is clear that Five Star stands alone among our peers when it comes to profitability.

Of the four largest publicly traded senior living operators in the United States, based on units, Five Star alone has achieved profitability in each and every one of the past seven quarters. Looking at things another way, our income from continuing operations for the past three quarters was $0.48 per diluted share excluding all one-time items that in aggregate had a positive impact of $0.02 per share. I would note that we recognize the importance of delivering consistent financial results to our shareholders. Over the past three quarters we've established a consistent trend and we aim to continue on this path.

We think this best in class operating performance in a challenging market environment underscores Five Star's value, differentiates us from our peers and shows that Five Star is solidly positioned to benefit from occupancy increases in the future. I would now like to read some highlights from what was an active quarter. During the third quarter we repurchased $925,000 of our convertible t notes at a 10% discount to par. We have $41.1 million of convertible t notes currently left that can be put to us in October 2013. In July we prepaid $4.5 million of a hud mortgage that bore and interest rate of 7.65%.

As we discussed in our second quarter call in August, Five Star acquired 110 unit independent and assisted living community in Wisconsin for $14.7 million. This community is nearly 100% occupied and has a 12-acre campus that allows for the possibility of immediate expansion. We are currently in the process of evaluating an Alzheimer's unit addition on this campus. We continue to see signs of stabilization in our occupancy. Senior living occupancy for the third quarter 2010 was 86.2% compared with 86.2% a quarter ago, and 86.4% a year ago. Same store occupancy for the third quarter 2010 was 86.1% compared with 86.4% a year ago.

Occupancy as of this past Friday was 86.1%. We continuously increased traffic to our buildings by utilizing the lease tracking system put into place in late 2008, we can see that inquiries continue to trend in a positive direction. Our inquiries in the third quarter 2010 increased about 9% over the second quarter of 2010. In the third quarter of 2010, we took on approximately 920 deposits which is up about 50 deposits from the second quarter of 2010. We continue to do a good job at pushing rate where possible.

Our senior living average daily rate increased 2.7% during the quarter. More importantly 2.9% on a same-store basis. With the apparent stabilization in our occupancy, we are trying to find the right balance in regards to discounting rates. As we reported on the last few calls, we were selectively discounting some of our tougher to rent units, primarily our independent living units. We have paired this back substantially in 2010.

Given that our occupancy has remained flat over the last several quarters, I view this as a positive sign. Looking forward we still expect our private pay rates to increase 3% to 4% in 2011. Moving on to other metrics. Wage and benefits as a percent of [senior living] revenues remained at 50.3% during the quarter down from 51.2% a year ago. This is an area where we have historically performed well. G&A as a percentage of revenues was 4.4%, down from 4.5% last quarter.

We still maintain the leanest operations in the industry. Our stated goal is to keep this figure around 4.5% of revenues. Our core senior living business continues to be profitable. Just over 85% of our total company revenue comes from this business. 70% of our senior living revenues are derived from residents' private pay sources. In the third quarter of 2010, Five Star Senior Living produced $23.6 million of EBITDAM compared to $26.7 million of EBITDAM for the second quarter of 2010.

Paul will cover this decrease in a few moments. More significantly, Five Star Senior Living produced 27% more EBITDAM in the third quarter of 2010 compared to the $18.6 million produced in the third quarter of 2009. The rehabilitation hospitals, which account for 8% of total revenues lost about $364,000 of EBITDAM during the second quarter compared with a loss of $323,000 last quarter. This is, however, a $636,000 improvement over the $1 million of EBITDAM lost during the first quarter of 2010. In August we had a state hearing from one of our proposed inpatient satellite units and currently awaiting state approval.

We continue to work on our traumatic brain injury unit at our Woburn and expect that to be up and running by year-end. We also received some positive news in regards to ERF Medicare rates. Effective October 1st 2010 we received a 2.2% increase to our rates. The pharmacy operations which makes up 6% of our total revenues made $563,000 on an EBITDAM basis during the third quarter. At the end of September we had approximately 12,700 customers and expect to add over 1,000 additional customers during the next several quarters.

The majority of those customer additions will be third-party customers. We continue to be well positioned from a balance sheet perspective. We ended the quarter with $37 million in cash and owned 24 unencumbered properties with $209 million in book value, not fair market value. If you consider Ventas' purchase of Atria at $230,000 per unit to be a fair market value, then our unencumbered properties could potentially have a fair market value of $477 million. Also at quarter end, our $35 million revolving credit facility was untapped and remains so today. The third quarter was another excellent operating quarter for Five Star.

We remain well positioned to take advantage of the gradual rise in occupancy that is anticipated for our industry. Our keys to success remain the same, increase occupancy and average daily rate, while holding labor, operating expenses, and G&A costs in check. . Throughout the past year we have performed consistently on the last four. We are stronger today compared to any point in our company's history. At this point, I'd like to turn it over to Paul Hoagland, our Chief Financial

Thank you, Bruce, and good afternoon, everyone. For the third quarter our senior living revenues increased $18.2 million or 7.2% to $270 million as compared with the third quarter of 2009. This increase was due primarily to revenues of $11.6 million from the eleven communities we began to operate during the fourth quarter of 2009 and the one community we acquired during the third quarter of 2010. Plus increased per diem charges to residents of 2.7% offset in a decrease of occupancy which decreased from 86.4% to 86.2%. The 2.6% increase in senior living revenues at the communities that we operated continuously since July 1, 2009, generated approximately $6.6 million of revenues at our comparable communities.

Senior living wages and benefit expenses increased $7 million or 5.4% to $135.8 million compared with last year. $5.8 million of this increase was due to our new communities. However, senior living wages and benefit costs for our comparable communities decreased as a percentage of revenues from 51.2% to 50.3% primarily due to improved labor controls and slightly favorable benefit costs. Other senior living operating costs increased by $3.1 million or 5% compared to last year. This was due to a $2.6 million increase from our new communities and a $485,000 increase at our comparable communities.

However, our senior living operating expenses decreased in the third quarter of 2010 to 24.3% as a percentage of revenues compared to 24.8% in the third quarter of 2009. We had less expense on our operating supplies and services as we are increasing our focus in these areas. As previously discussed, we are taking steps to reduce our utility expenses, but the seasonality of our business has historically seen our utility expense at its highest point in the third quarter. And this quarter was consistent with the previous year.

We pointed out in our second quarter call that it was our expectation based on historical patterns that third quarter utility expense would increase by 60 basis points as a percentage of revenues. This proved to be the case and amounted to a $2.3 million sequential increase in utility costs over the second quarter. As you recall, we recently entered into an outsourced processing arrangement with a third party that will pay, analyze and purchase energy for our company. The initiative will become operational during the first quarter of 2011. In addition, we are making a capital investment of just under $3 million in a lighting retrofit program that will be completed early in 2011.

In total, we expect to see a reduction of between $2 million to $3 million in annual utility expense in 2011 as a result of these initiatives.. As Bruce noted, our income from continuing operations was influenced by nonrecurring items in the third quarter of 2009. Income from continuing operations for the third quarter of 2009 included several items that in aggregate resulted in a positive impact of $4 million or $0.12 and $0.10 per share, basic and diluted respectively to our earnings. These items were a $3 million gain on early extinguishment of debt, a $795,000 gain on sale of investments held by our captive insurance company, and a $455,000 unrealized gain on our UBS put right related to auction rate securities, offset by a $238,000 unrealized loss on our holdings of auction rate securities.

These items were a $3 million gain on early extinguishment of debt, a $795,000 gain on sale of investments held by our captive insurance company, and a $455,000 unrealized gain on our UBS put right related to auction rate securities, offset by a $238,000 unrealized loss on our holdings of auction rate securities. Now turning to our ancillary businesses, the rehabilitation hospitals generated a third quarter EBITDAM loss of $364,000. Hospital revenues were up $115,000 or 0.5% compared to last year, primarily due to increasing third-party insurance provider rates, offset by a decrease in occupancy, which decreased from 58.6% to 54.8%.

Hospital expenses as a percentage of revenues decreased by 23 basis points during the quarter due to decreases in labor and benefit expenses. Our pharmacy operations achieved a $563,000 margin in the quarter which was virtually unchanged from the results of the third quarter of 2009. Pharmacy revenues were up 7.5% compared with last year due to the impact of adding new customers, which was partially offset by lower average revenues per prescription due to higher sales of generic drugs.

Total pharmacy expenses increased by 7.8% from the prior year due to higher costs associated with our rise in customer base. During the third quarter, general and administrative expenses increased by $286, 000 or 2.1% from last year due to higher corporate and regional support costs associated with communities which we began to operate in the fourth quarter of 2009. Our G&A costs as a percentage of revenues decreased from 4.6% to 4.4% and are within our range of expectations.

Rent expense increased $3.2 million or 7.1% compared to last year with most of the increase due to new acquisition rent expense of $2.6 million. Income tax expense was a benefit of $123,000 in the third quarter and absent any unusual gains or losses next quarter we expect taxes to be about $500,000 in the fourth quarter. Before concluding today, let me review our liquidity, cash flows and selected balance sheet items. Cash provided by operating activities in the third quarter was $48.7 million due to the EBITDA performance and the redemption of our remaining auction rate securities which net of borrowings on our UBS facility at that time was $35.2 million.

During the quarter we invested in the acquisition of Huntington Place, repaid a mortgage, and repurchased a small amount of convertible debt for a total outlay of $19.1 million. Collectively, these uses of our cash will increase our annual EPS initially by approximately $0.05 per share. At September 30, we had cash and cash equivalents of $36.7 million. We continue to have nothing drawn on our $35 million revolving line of credit, and we are in full compliance with all covenants. Today, our balances remain undrawn.

Consolidated EBITDA, excluding certain items noted in our press release, increased by 85.2% to $10 million from $5.4 million last year. We made $12.3 million of capital investments during the quarter, and sold $8 million of Capex to Senior Housing. Our accounts receivable management remained strong, as the number of days sales outstanding for our consolidated operations was 20.2 days at September 30, which remains very low and well controlled.

At the end of the third quarter, we had $209 million of net property and equipment, which included 26 properties directly owned by Five Star, 24 of which are unencumbered by debt. We had $41.1 million of convertible senior notes and $7.9 million of HUD mortgages outstanding. We believe we are in compliance with all material terms of our credit, note and mortgage arrangements.

With that I would like to open it up for questions for Bruce and I. Thank you very much.

(Operator Instructions). The first question is from Joel Ray with Davenport and Company. Please go ahead.

Good afternoon, folks.

Good afternoon, Joel. How are you doing?

I'm doing great. I want to congratulate you because it was a nice, clean quarter.

Thank you very much. Appreciate that.

Right on target. One simple question. Could you, Paul, elaborate on the tax credit that occurred in the quarter of roughly $100,000 versus paying taxes?

Yes it was basically the result of a tax true up which we do in the third quarter. We will do a little more tidy up in the fourth quarter, but it was a true up . It had to do just with a previous year and again is not a cash implication to us at this

I think the timing really revolves around a the fact that we file our corporate returns in the third quarter.

So it is a settlement or a completion of prior year audits?

Correct.

Okay. Very good, and again it sounds like things are coming along pretty well. Are there any new initiatives that you have underway on the occupancy side, meaning trying to build that as far as marketing plans at this point?

I wouldn't say anything substantially new. It is something that we tweak and monitor on a regular basis. We are looking at how the group is structured right now, and we might tinker with that a little bit, but nothing significant overall. I think if you look at where our occupancy was in the third quarter and compare it to the NIC data that just came out today. It really falls right in line with what that showed. I think the positive though is I think we are getting a little bit better rate increases then what the NIC MAP data is showing so while our occupancy was flat, what the NIC data showed, our rate bumps are probably about 100 to 150 basis points higher then what the NIC MAP data is showing. So I think that's a positive as well.

Again, very good and thanks very much. Great quarter.

Great, thanks. Appreciate it.

The next question is from Jerry Doctrow with Stifel Nicolaus . Please go

Hi. Just a couple of different things. Bruce, again, sometimes I give the occupancy stuff for you guys is reported with the skill in it as opposed to separated. If we think about just the pure, private pay versus the skilled, can we just get a little color on the occupancy and rate (inaudible) Q over Q maybe the move?

Yes, if you look at page six and seven of our press release we issued today, it was really flat year over year at 86.4% for our assisted and independent living occupancy. I think the one little misleading thing that might be in that, I would pick misleading, but we do have our skilled units that are in our CCRC's in that number as well. So it is just something to keep in mind. And our SNF occupancy was the one that did fall year over year in the skilled nursings.

Okay. So the private pay stuff was -- quarter over quarter private pay was fairly flat, is that the right take away?

Yes, quarter over quarter from 2009 to 2010.

And from 2Q to 3Q how about.

I would say flat as well. I don't have it with me but If it moved within 10 basis points, That's probably it.

Okay. And just any -- you talked about additional inquiries and that sort of thing. Are you feeling sort of more optimistic we will see some traction on occupants as we go forward? Any sense of that?

To piggyback a little bit on what I just told Joe. Obviously the goal is to increase that. What happened with it stabilizing, what the NIC MAP data showed, do we want more? Sure. I think we will see some positive movement. I think a lot will come with the macroeconomic trends in the general economy as housing and jobs start to improve. I think you see it in overdrive on that.

And you bought this CCRC. It was not clear from at least what we read whether it was entrance fee or rental. I was just trying to get maybe a little bit of the metrics on that so we can build it into the numbers for the next quarter.

Sure, it is a straight rental. CCRC, there is no skilled nursing. It is IL, AL and ALZ. The unit mix is probably 60 units of IL, 30 units of AL and 20 units of ALZ, somewhere in that range. The average monthly rent is probably about $3400 to $3500 a month. So it's slightly north of the 35% EBITDA margin.

Okay, that should be enough. And the expense growth, I know we spent some time on this last quarter and I thought we would try to build in the energy stuff which you talked about on the call. It looked like there was a little bit bigger expense swing so I have two questions. One is sort of seasonal, is there something else that is going on we should be thinking about? And as we go to 4Q does this level of expenses look about right? Are there other meaningful fluctuations we should be thinking about?

Jerry, to answer the question two fold, from Q2 to Q3, really the biggest item which accounted for most of the change was utility, purely seasonal and purely in line with previous year. We had a little bit of movement in all of our line items below that Q2 to Q3, but on average there was nothing unusual. They pretty much netted out. As we look forward though to Q4, we do expect to see a little bit of relief in utilities. However, historically the Company in Q4 has spent a little bit more on food and other supplies associated with holiday activities and the sort. So I think when we do look at our other operating expenses, Q3 of 2010 and look forward to anticipation into Q4, it looks to be approximately the same one.

And the wages that bounce up a little bit in 4Q as well for holiday vacations and stuff as well or not as meaningful.

Not so much. We made an extra effort of accruing and getting more accurate with our paid time off and vacation accrual. Although there was a little bit up tick in Q4 of 2009, we don't expect to see that going into Q4 of 2010.

Okay. And I guess, Bruce, we've obviously continued to sort of ask every quarter and I shouldn't miss out again this quarter again, you know any thoughts about strategically dealing with the ERF's or in pharmacy businesses, anything going on there we should be thinking about?

No, I appreciate that. I think my answer will be similar as the last quarter. I think the board would reconsiders something if something was to come along. And that hasn't happened this quarter, but again it is something we're not ruling out. It just hasn't happened yet.

Thanks, That's all for me.

Alright, thank you Jerry.

Now we will go to the line of Michael Demaray with Elevated Capital. Please go ahead.

Hi, guys, good quarter. Hi, Michael.

Hi Michael.

Looking out, what do you see the target capital structure for the business to be? Are you comfortable with the level of debt that is on the company right now? Are you looking to reduce that?

We are extremely comfortable with the level of debt. Paul, we have $41 million (inaudible) and less than $10 million of convertible (inaudible) that. So we are very comfortable. The convertible debt will be put to us in three years so we know that's coming. We have 24 unincumbered properties. I gave some metrics on my prepared remarks about where the book value was. What a potential fair market value was. So there is room to change it. I think we just need to be looking at what opportunities we might be able to take advantage with our balance sheet in the future. Right now there is nothing on the horizon, but we are looking all the time.

Okay. I guess my question is also about capital allocation and what you guys are thinking uses of cash will be going forward. I know obviously the bonds look like they have traded up closer to par now and some investors were advocating share repurchases back when the shares were around $3, so wondering in you were given other consideration to that, or do you see investment opportunities that have higher returns? And then maybe you can also explain why you might -- why you would prioritize paying down a hud loan with single digit interest rates over doing something else?

Well, right now if I look at the priorities of the Company, it's still -- if we can find (inaudible) at an attractive price, and as you said that is much harder to do now, that would be a priority. And looking at investments that have the double-digit returns that we have achieved in the past, that would be a secondary. I just felt with the hud loan we bought back, we have cash in our balance sheet earning 10 basis points. It seemed like a positive thing to do to get rid of the debt to around 7.5%.

Okay. I'm just looking at the implied returns on the equity, what makes you hesitate about a share repurchase?

Well, two things. One is we still have a fairly small float and we would lose some interest and we may gain some interest but I think we would lose some interest on that front. And number two is the future is really still uncertain in terms of potential capital and I am being extremely conservative right now in saying that we might need something down in the future and we don't want to put too much out right now that could hurt us later. It's a very conservative view but it is one that we have taken right now. I don't see it changing in the in the near term, but it might change in a few quarters. So, again, it is something that we've never ruled out. It's just something that we're not considering at this time.

Okay, thank you.

Alright Michael. Thank you.

And with no one else in cue, I will return the call to Mr. Bruce Mackey.

Great. Thank you very much. Thank you all for joining us in today's call. We look forward to updating you on our Q4 results in late February. Thank you.

That does conclude our conference for today. Thank you for your participation and for using the AT&T tele conference. You may now disconnect.