Alerislife Inc (ALR) 2010 Q4 法說會逐字稿

Good day, and welcome to the Five Star Quality Care fourth quarter financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead.

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 consent of Five Star.

Before we begin today's conference 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, February 22, 2011. 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 & 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 now I would like to turn the call over to Bruce Mackey.

Great. Thanks, Tim. And thanks, everyone, for joining us this afternoon.

Just after market close, we reported net income from continuing operations of $0.18 per basic share, and $0.17 per diluted share for the three months ended December 31, 2010. This compares with $0.02 per basic and diluted share that we reported for the same period a year ago. However, income from continuing operations for the fourth quarter of 2010 and 2009 included several items that, in aggregate, resulted in a positive impact of approximately $1 million and $412,000 respectively. Paul will review those one-time items in his prepared remarks. So excluding nonrecurring items, fourth quarter 2010 income from continuing operations was $0.15 per basic and diluted share, which was a substantial increase over fourth quarter 2009 income from continuing operations of $0.01 per basic and diluted shares.

While Five Star looks for occupancy to improve, we do so from a position of strength and solid profitability, which is unique to the industry. Of the four largest publicly traded [senior living operators] in the United States based on units, Five Star alone has achieved profitable in each of everyone of the past eight quarters. Looking at things under the way, our income from continuing operations for the year was $0.63 per diluted share, excluding all one-time items.

I would note that we recognize the importance of delivering consistent financial results to our shareholders. Over the past four quarters, we've established a consistent trend, and we aim to continue on this path in 2011. 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 review some highlights from the quarter. Senior Living occupancy for the fourth quarter of 2010 was 85.9%, compared with 86.2% a quarter ago and 86.2% a year ago. Same-store occupancy for the fourth quarter 2010 was 85.8%, compared with 86.2% a year ago. Occupancy as of this past Friday was at 85.7%.

The biggest occupancy challenge during the fourth quarter came from our Skilled Nursing business. This drop was somewhat in line with the fourth quarter [nic knapp] data that was released a few weeks ago, and is consistent with what we saw in years past. People typically don't have elective surgeries around the year-end holidays, and that seemed to be the case for us this year. After year end, we saw our Skilled Nursing business pick up, but that has been offset by a slight decrease in our private pay business. We noted a slowdown in our inquiry [and deposit activity] after Thanksgiving, and our move-ins did not keep pace with our move-outs in January. I am pleased to report that this trend has started to reverse in February.

Same-store inquiries in the fourth quarter of 2010 increased about 12% over the fourth quarter 2009, but were down about 20% from last quarter. Same-store deposits were up in the fourth quarter of 2010, approximately 18% compared to the fourth quarter of 2009, but again were down about 18% when compared to deposits in the third quarter of 2010. Given the seasonality of our business, a decrease in these activities between the third and fourth quarters isn't uncommon. Some good news here is that our inquiry and deposit activity picked up in January, 2011. We had 467 more inquiries in January compared to our monthly average of 3,550 in the fourth quarter of 2010. We also saw an increase in deposits as well. In January we took on 290 deposits, which compares favorably to our monthly average of 265 deposits in the fourth quarter of 2010.

We are doing a good job of pushing rate where possible. Our Senior Living average daily rate increased 4% during the quarter. More importantly, 4.6% on a same-store basis. Looking forward, we still expect our private-pay rates to increase 3% to 4% in 2011.

Moving on to other metrics. Wages and benefits as a percent of sales and revenues were 50.4% during the quarter, down from 51.4% a year ago. G&A as a percentage of revenues was consistent with last year at 4.6%. 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 revenues come from this business. 70% of our Senior Living revenues are derived from residents' private-pay sources. In the fourth quarter of 2010, Five Star Senior Living produced $25.4 million of EBITDAM, compared to $23.7 million of EBITDAM last quarter. More significantly, Five Star Senior Living produced 39% more EBITDAM in the fourth quarter of 2010 compared to the $18.4 million produced in the fourth quarter of 2009. The [relocation] hospitals, which account for 8% of total revenues, lost about $421,000 of EBITDAM during the fourth quarter, compared with a loss of $364,000 last quarter.

In August we had a state hearing for relocating one of our in-patient satellite units to a brand new facility that is under construction. This was approved by the state in the fourth quarter of 2010, and we expect to move to our new location by the end of 2011. We also completed work on our traumatic brain unit our [women] hospital. We now operate perhaps the finest and most advanced traumatic brain injury unit in the country. Our unit opened to patients in mid-January, and we have been very pleased with the results so far. We are still continuing our efforts to move excess license capacity at our hospitals to third-party host hospitals, but as of now, we have nothing significant to report on.

The Pharmacy operations, which make up 6% of our total revenues, made $186,000 on an EBITDAM basis during the fourth quarter. This was about a $150,000 improvement over the fourth quarter of 2009, but a drop of $377,000 from last quarter, which is primarily due to a drop in Skilled Nursing occupancy, not only at Five Star communities, but at our third-party communities as well. In addition, we did lose some contracts during the fourth quarter of 2010. At year end we had approximately 12,100 customers and except to add over 1,000 additional customers during the next several quarters.

Our balance sheet remains strong. We ended the quarter with approximately $20.8 million in cash, and had in excess of $200 million of book value, not fair market value, in net property and equipment. This includes 26 of the properties we own, 24 of which are unencumbered with debt. Also at quarter end, our $35 million revolving credit facility was untapped and remains so today. During the fourth quarter, we repurchased $3.2 million of our conversable senior notes at a 5% discount to par. We have $37.9 million of convertible senior notes currently left that can be put to us in October, 2013.

I would also like to highlight on February 4, Five Star began training on the New York Stock Exchange after moving from the New York Stock Exchange Amex.

In addition to the higher level of financial standards for listed companies, we believe this move to the big board makes Five Star more appealing to a wider group of investors and may provide all investors with more liquidity.

The fourth quarter was another excellent operating quarter for Five Star. We ran 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 cost in check. Throughout the past year we have performed consistently on the last four, and we are stronger today than perhaps at any point in our Company's history.

We do realize, however, that Five Star's largest opportunity to significantly enhance shareholder value is to increase occupancy. Every percentage point increase in occupancy will increase our revenues by an additional $10 million. The majority of these additional revenues will flow to our bottom line. As the economy continues to improve, so will our occupancy. For several years prior to the recession, our occupancy was above 90%, and I expect us to get back to those levels once again. However, I feel we need to increase our efforts and resources in 2011. To address this we are taking the following important steps.

We are excited to report that we are bringing on a new Vice President of Sales and Marketing. This person has close to 20 years in experience in sales and marketing, and over the last several years was in a very senior position at a large national senior-living company. This is a newly created position at Five Star. Previously our sales and marketing efforts were overseen by a Director of Business Development who will continue in her role and will report to the new Vice President of Sales and Marketing.

We are expanding the number of our Regional Directors of Sales and Marketing by about 25%. We expect to have these positions filled in the next few months. This will allow our regional personnel to spend more time at a fewer number of communities. Neither these additional personnel or the addition of your new Vice President of Sales and Marketing should impact our overall general and administrative costs, as we have been able to identify efficiencies that will offset the costs associated with these new hires.

Over the past three years, Five Star spent just under $200 million in improves to make sure our buildings are in top physical condition. We plan to spend another $55 million in 2011. We believe with our communities in top shape and our renewed focus on our sales and marketing efforts, we are truly poised for a significantly upturn in our occupancy in the future.

At this point I would like to turn it over to Paul Hoagland, our Chief Financial Officer.

Thank you, Bruce, and good afternoon, everyone.

For the fourth quarter our Senior Living revenues increase $15.1 million,or 5.9%, to $270 million as compared to the fourth quarter of 2009. This increase was due primarily to revenues of $8 million from the 11 communities we began to operate during the fourth quarter of 2009, and the one community we acquired during the third quarter of 2010, plusincreased per diem charges to residents of 4%, offset by a decrease in occupancy, which decreased from 86.2% to 85.9%. The 4.6% increase in per diem charges to residents at our communities that we have operated continuously since October 1 of 2009, generated approximately $11.6 million of revenues at our comparable communities. Also during the fourth quarter of 2010, we had a small benefit of approximately $4.1 million, or 1.5% of our total Senior Living revenues, as a result of the implementation of [rugs four] in October of 2010.

Senior Living wages and benefits expense increase $5.1 million, or 3.9%, to $136.2 million compared with last year. $4.1 million of this increase was due to our new communities. However, Senior Living wages and benefit costs for our comparable communities decreased 100 basis points as a percentage revenues, from 51.4% to 50.4%, primarily due to improved labor controls and slightly favorable benefit costs. Other

Senior Living operating expenses increased by $939,000, or 1.5% to last year. This was due to a $1.2 million increase from our new communities, offset by $237,000 decrease at our comparable communities. As a percentage of revenues, Senior Living operating expenses decrease 100 basis points from 24.5% to 23.5%. We had less expense in our operating supplies, services and food, as we are increasing our focus in these areas.

In addition, we enjoyed a reduction in utility expense as well. And as previously mentioned, we continue to take steps to reduce our utility expense. The seasonality of our business sees utility costs at their highest levels during first and third quarters. During the fourth quarter 2010, our utility expense followed the same pattern, decreasing by $1.6 million from last quarter, solely due to usage. Most notably, utility expense as a percentage of revenues dropped 70 basis points in the fourth quarter of 2010 compared to the third quarter of 2010, which was a more significant decline than the 50 basis point drop we saw from the third quarter of 2009 to the fourth quarter of 2009. As you'll recall, in 2010 we entered in to an outsourced processing arrangement with the third-party that will pay, analyze and purchase energy for our Company. This initiative hasbeen become operational as we start the new year. And in addition, we made a capital investment of just under $3 million in a lighting retrofit program that was completed at the end of 2010. As we stated before, we expect to see a reduction of our consumption of utilities and resulting expense in 2011 as a result of these initiatives.

As Bruce noted, our income from continuing operations was influenced by nonrecurring items in both the fourth quarter of 2010 and 2009. Income from continuing operations for the fourth quarter of 2010 included several items that in aggregate resulted in a positive impact of $1 million, or $0.03 per basic and diluted share to our earnings. These items included an $108,000 gain on early extinguishment of debt and $933,000 gain on sales of available for-sale securities. Income from containing operations for the fourth quarter 2009 included several items that in aggregate resulted in a positive impact of $412,000, or $0.01 per basic and diluted share to our earnings.

Now turning to our ancillary businesses. The Rehabilitation hospitals generated a fourth quarter EBITDAM loss of $421,000. Although hospital revenues were up $672,000, or 2.6% compared to last year, due primarily to increasing third-party insurance providing rates, they were offset by a decrease in occupancy, which decreased from 59.8% to 52.5%. Hospital expenses as a percentage ofrevenues increased 60 basis points during the quarter due to the unfavorable leverage of decreasing occupancy and slight increases in labor and benefit expenses.

Our Pharmacy operations achieved a $186,000 margin in the quarter. Pharmacy revenues were up 2.6% compares 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 1.8% from the prior year due to higher costs associated with our rising customer base.

During the fourth quarter, general and administrative expenses increased $835,000, or 6.1% from last year, due to higher corporate and regional support costs primarily associated with communities we began to operate during the fourth quarter, 2009. Our G&A cost as a percentage of revenues remained at 4.6% and are within our range of expectation. Rent expense increases $2.1 million, or 4.6% compared to last year, with most of this increase due to new acquisition rent expense of $1.1 million. Income tax expense was $518,000 in the fourth quarter.

During the fourth quarter, we reclassified the operations of three Skilled Nursing facilities located in Georgia into discontinued depreciations. These properties are leased from Senior Housing and are in the process of being sold. Additionally we decided to continue to operate one Assisted Living Community that was previous included in discontinued operations.

Let me now review our liquidity, cash flow, and selected balance sheet items. Cash provided by operating activities in the fourth quarter was a loss of $1.3 million, due to seasonal considerations and working capital usage. During the fourth quarter werepurchased a small amount of convertible debt for a total outlay $3 million, and for the year we repurchased a total of $11.8 million of convertible debt.

At December 31 we had cash and cash equivalents of $20.8 million. We continue to have nothing drawn on our $35 million revolving line of credit, and we're in full compliance with all covenants. Today our balances remain undrawn.

Consolidated EBITDA, excluding certain items noted in our press released, increased 118% to $10.7 million from $4.9 million last year. We made $17.2 million of capital investments during the quarter, and sold $8.1 million of capital improvements to Senior Housing.

Our accounts receivable management remains strong, as the number of days sales outstanding for our consolidated operations was 20.3 days at December 31, which remains very low and well controlled. At the end of the fourth quarter, we had $214 million of net property and capital, which includes the 26 properties directly owned by Five Star, 24 of which are unencumbered by debt. We had $37.8 million of convertible senior notes and $7.7 million of long-term HUD mortgages outstanding. We believe we are in compliance with all material materials of our credit, note and mortgage agreements.

In closing, we remain focused on increasing our occupancy, and as Bruce mentioned, we are taking active steps by making investments in marketing and sales initiatives to do so. We continue to invest significantly in our capital upkeep of our properties and have been rewarded with an average comparable community rate increase of 3.2% over the last six quarters. For the full year 2010, we revisited and refined our cost controls, and experienced an 80 basis point reduction in wages and benefits and a 60 basis point reduction in other Senior Living operating costs. We are confident that our improved processes will provide tailwinds as we enter 2011. We are well positioned to capture strong margins and flow through as we increase our occupancy, and are well positioned to make profitable acquisitions.

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

Thank you. (Operator Instructions). And the first question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Hi. So a couple of things. Just one on just unit counts, because I wasn't sure if that some of that -- the stuff you've moved in and moved out was in the numbers for the quarter or not. So on just Senior Housing and Skilled Nursing, do you have unit counts there that's in the continuing operations as we go in to the first quarter of the year?

Jerry, this is Bruce. I don't know if he have got it exact, but ballpark I think we took about 300 SNF units, 250 to 300 out, and we had to put back about 125 AL units. Somewhere in that range.

Okay. Maybe we can just get the specific number off line. And then just on the converts, I mean -- I guess I was trying to understand whether there's a strategy of continued purchases, or just how should we be thinking of that going forward.

If we can buy converts in that 95% range, we're a buyer. It has been challenging to go so at this point in time.

Okay. So maybe continued small purchases, but not -- you wouldn't expect anything of size?

Correct.

And doe have the exact interest expense on the converts for the quarter? Because we need to take it out to get the adjustments for the share count. I didn't see that.

Yes, Jerry this is Paul Hoagland. I will follow up offline and get that to you right after the call.

Okay. And then I guess just on the broader parts of the business, maybe two or three questions if you could.

Sure.

It sounded like basic Senior Housing, other than ups and downs for end of the year occupancy and stuff, you are feeling relatively good about. Skilled Nursing, if we take out -- would those units that you put into discontinued ops make any difference there, or you are expecting occupancy to come back there? I guess I was just trying to get a little color on each of those, and then maybe the [ERFs] and the Pharmacy as well?

I'll start, at least with the occupancy piece. Our Senior Living business, the AL/IL, was very consistent in the third quarter and into fourth quarter. We did get hit in the fourth quarter on the (inaudible -- line noise) side. The properties that we put into discontinued I don't think really moves the needle that much. As you know, a lot of our Skilled Nursing facilities are in rural areas, and that's where we saw the significant impact. Really we were down about a little over a hundred basis points. It started to come back, I can tell you that though, in January and February so far.

And do you expect more benefit from [rugs 4] as you roll into the first quarter?

I wouldn't say we expect more benefit, but we expect the benefit that we saw in the fourth quarter to continue.

Okay. And then, I guess on [ERFs], I mean you talked a little bit about strategy of trying to do the satellites. When to you expect -- now that you have gotten approval, when do you expect that satellite facility to move and will it impact the number much? And just your broader thinking about that space?

We expect to be done by the end of the year, so literally a facility is being built. We've got the determination of need that was approved by the state at the end of the fourth quarter. That will happen by the end of the year, [buying] construction hitting on time, and we expect it will at this point so far. We expect that to significantly improve, one, in-patient location's margins. Would that be enough to get us to break even on a consistent basis? Possibly, possibly not. I think when you combine that with the traumatic brain unit we just opened, again that will take some time, but the early indicators are that is unit performing well, and we expect it to continue to perform well and only improve over time. You combine those two units, and then we get that much closer. If we are successful in other negotiations that we have in terms of potentially relocating a in-patient satellite units or an additional in-patient unit, I think we'll be very -- at that point we're talking profitability not being close.

Okay. So just in thinking about it, we should be thinking about this loss maybe very gradually working down, but there will still be a loss for this year, because you won't see the new unit open until late in 2011. So maybebreak even 2012. We would still see some loss for this year. Is that kind of what your thinking is?

Correct. Yes, that's fair.

And how about just on the Pharmacy?

Pharmacy, like I said, we did lose some contracts and our occupancy was done. We expect that to come back a little bit. We have got several -- most of the customer additions that I've talked about it -- I know in some quarters that has varied, whether it is going to be mostly Five Star or mostly third party. Right now we have got a lot of Five Star communities that we are looking to add, so we've got direct control over those next [steps] to come on line over the next several quarters. So I would expect us to get back to the -- we were at 12-[16] at the third quarter, we were at 12,100 atthe end of the fourth quarter. By the end of the year, we should be close to that 13,000 number, if not more than that.

Okay And therefore the margins --

Will come back as well.

Will come back as well.

That is correct, yes.

And strategically you had talked about, I think on the last call, just thinking strategic options for both the -- maybe the [ERF] and the Pharmacy. Any update on that?

No. No significant updates. We talked about if -- these businesses are both under the microscope. They continue to be under a microscope, but no significant update.

Okay. All right. Thanks. That's all for me.

Okay.

(Operator Instructions). Seeing no additional questions at this time, I would like to turn the conference back to Mr. Bruce Mackey.

Great. Thank you. And thank you all for joining us on today's call. We will be at the Jefferies Global Health Care Conference in March in New York City. We hope to see some of you there. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.