Alerislife Inc (ALR) 2011 Q1 法說會逐字稿

Good day and welcome to the Five Star Quality Care first-quarter 2011 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 Five Star's Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you and good morning, everyone. Joining us 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 conference is 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, April 28, 2011. The Company undertakes no obligation to revise or 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 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 undue are lines on any forward-looking statements. And now I would like to turn the call over to Bruce Mackey.

Thanks, Tim, and thanks, everyone, for joining us today. Early this morning we reported net income from continuing operations of $0.16 per basic share and $0.15 per diluted share for the three months ended March 31, 2011. This compares with $0.13 per basic and diluted share that we reported for the same period a year ago.

During the trailing four quarters our diluted net income from continuing operations is $0.71, strengthening our consistent profitability trend over the past two-plus years. We recognized the importance of delivering consistent financial results to our shareholders, and we will continue to do so.

Before we get into the financial highlights on the quarter I would like to review some exciting acquisitions and disposition activity that we expect to close during the second and third quarters of this year. First, in early March Senior Housing Properties Trust announced that they are acquiring a 20-community portfolio from Bell Senior Living for $304 million. We will be entering into a traditional net lease for five of these communities and will be entering into a management agreement for the other 15 communities. In total, the 20 communities have 2111 living units, and the breakdown is as follows -- 814 Independent Living Apartments, 939 Assisted Living Suites, 311 suites which offer specialized Alzheimer's care and 47 skilled nursing beds.

These communities fall nicely into Five-Star's existing footprint in the Southeast. Seven communities are in North Carolina, five communities are in South Carolina, four communities are in Florida. Two are in Virginia and two are in Georgia. We are currently negotiating the terms of the lease and management agreements with senior housing and will report on those terms at their conclusion.

This portfolio is significant to Five Star for a number of reasons. First, as I just mentioned, the communities fit into our existing footprint. We can operate these communities without significantly increasing our regional headcount. Second, there is potential upside for us by increasing occupancy and discovering cost efficiencies. As of March 31, 2011, the portfolio was 88% occupied. Lastly, we may be able to add Five Star's pharmacy services to a number of the communities as well as at our outpatient rehabilitation business and all that ancillary income will drop to our bottom line. We expect to close on this transaction during the second and third quarters.

Next on the acquisition front, we are acquiring the 73-unit community in Rockford, Illinois. This community is 86% occupied and was built in 1999. We will be leasing this community from Senior Housing through a traditional net lease. We expect to close on this transaction next week.

Lastly, Five Star has agreed to purchase several properties using our own balance sheet. As we have discussed our growth strategy along with traditional sales/leasebacks, we would like to grow our own portfolio when the opportunity arises in the acquisition makes sense for Five Star. The first acquisition is a property in Arizona we have agreed to purchase for $25.6 million. It is a 116-unit community that is 97% occupied. The property was built in 1996 and remodeled in 2006. It has 10 acres of land for possible expansion. We are assuming $18.7 million of Fannie Mae debt which is due in 2023 and has a rate of 6.6%. The balance is to be paid in cash. We expect to close on this transaction next week.

The second acquisition is a group of communities that we have agreed to purchase in excess of $100 million with about 750 units located in a Midwest state. We expect to close on this transaction in either the second or the third quarter and will update you on the detail shortly. We are currently in diligence with these properties. I would like to remind you that this transaction is subject to customary closing contingencies, and it may not close.

On the disposition side we expect to close on the sale of three skilled nursing facilities located in Georgia that we lease from Senior Housing. This deal was announced on our last quarter's call. During the first quarter we also agreed to sell two skilled nursing facilities located in Michigan. The buyer is conducting diligence now, and we expect this deal to close in either the third or fourth quarter.

We see this pickup in transaction activity a reflection of the gradual rebound in the senior living market and a reflection of Five Star's strength as an operator. 2011 is shaping up to be a very exciting year for Five Star.

I would now like to review some highlights from the first quarter. Senior living occupancy for the first quarter of 2011 was 85.5% compared with 85.9% a quarter ago and 86.2% a year ago. Same-store occupancy for the first quarter 2011 was 85.4% compared with 86.2% a year ago. Occupancy as of yesterday was 86.2%.

Historically Q1 is the weakest quarter for us in terms of occupancy. So, while we are concerned with it slipping a bit from Q4, without question increasing census is Five Star's number one priority. As I told you on our fourth-quarter call, in April we added a Vice President of Sales and Marketing to our team, a new position to our Company, and we are in the process of expanding our regional sales teams. The senior management team is working closely with our new sales and marketing leadership to increase the efficiency, accountability and ultimately the success of our sales programs. We will be thorough in our review.

For example, we expect to more heavily weight the occupancy component that determines the executive director's and marketing staff's compensation and measure and reward cross-community cooperation in generating leads.

Same-store inquiries were up 9% in the first quarter of 2011 compared to last year and were also up 6% from last quarter. Same-store deposits in the first quarter of 2011 declined 17% from last year but were up 10% from last quarter. While I am pleased that inquiries are turning in the right direction, there are opportunities for us to do a better job of converting inquiries to tours and of tours to deposits. This is a main focus for our new Vice President of Sales and Marketing.

We did, however, take on the highest amount of deposits since last August during March 2011. Deposits in March were also at their second-highest level over the last 12 months.

We continue to push our private pay rates when possible. Our senior living average daily rate increased 3.5% during the quarter, more importantly, 3.7% 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 (inaudible) revenues were 49.5% during the quarter, virtually unchanged from last year, which was 49.4%. G&A as a percentage of revenues was consistent with last year at 4.4%. 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. 71% of our senior living revenues are derived from residents' private-pay sources. In the first quarter of 2011, Five Star senior living produced $24.6 million of EBITDAM, up 9% from $22.6 million last year. The Rehabilitation Hospitals, which account for 8% of total revenues, lost about $1 million of EBITDAM during the first quarter, which is consistent with last quarter.

On a more positive note, the Center for Medicare Services recently issued a proposal for 2012 to increase their ERP rate by 1.5%. If passed, this proposal will positively impact our rehab business.

We now have approval from the state to relocate one of our 20-unit poor performing inpatient satellites, which we expect to move to a brand-new facility by the end of 2011. The traumatic brain injury unit at our Woburn Hospital opened to patients during January, and we have seen positive results so far. Even though we are still developing our program and are in the credentialing process, we have taken on just over 10 patients that we would not have gotten without the new unit.

The pharmacy operations, which make up 6% of our total revenues, made $448,000 on an EBITDAM basis during the first quarter. This is about a $100,000 decline from the first quarter of 2010 but an improvement of $252,000 from last quarter. Currently, we have approximately 12,400 customers and expect to add over 1000 additional customers during the next several quarters.

Our balance sheet remains strong. We ended the quarter with approximately $26 million in cash and have in excess of $200 million of book value, not fair market value, in net property and equipment. This includes 24 of the properties we own, which are unencumbered with debt. Also at quarter end, $5 million of our $35 million revolving credit facility was engaged and outstanding, and it has since been repaid and nothing is outstanding today.

During the first quarter we repurchased $623,000 of our convertible senior notes at a 3% discount to par. We have $37.3 million of convertible senior notes currently left that can be put to us on October 2013.

The first 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 are formed consistently on the last four, and we are stronger today than perhaps at any point in our Company's history. Our solid results attest to the strength of Five Star and the opportunistic position we are in as we wait for the overall industry to improve.

As I said last quarter, we realize Five Star's largest opportunity to significantly enhance shareholder value is to increase occupancy. Every percentage point increase in occupancy increases 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.

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

Thank you, Bruce, and good morning, everyone. For the first-quarter senior living revenues increased $8.2 million or 3.2% to $263 million as compared with the first quarter of 2010. This increase was due primarily to revenues from the one community we acquired during the third quarter of 2010 plus increased per diem charges to residents of 3.5%, offset by a decrease in occupancy which decreased from 86.2% to 85.5%. The 3.7% increase in per diem charges to residents at the communities we have operated continuously since January 1, 2010 generated approximately $9.4 million of revenue.

Senior living wages and benefit expense increased $4.3 million or 3.4% to $130.3 million compared with last year. $416,000 of this increase was due to our new community, and $1.8 million was from health insurance and workers compensation. As a percentage of revenues, senior living wages and benefits were 49.5% or 10 basis points higher than in the first quarter of 2010, which was 49.4%. Other senior living operating expenses increased $1.1 million or 1.8% compared to last year. This was due to a $223,000 increase from our new community and an $892,000 increase at our comparable communities.

As a percentage of revenues, senior living operating expenses decreased 30 basis points from 24.4% to 24.1%. We had less relative expense in our operating supplies, services and food, as we are increasing our focus in these areas.

We continue to take steps to monitor and reduce our utility expense. The seasonality of our business sees utility costs at their highest levels during the first and third quarters. During the first quarter of 2011 our utility expense followed this same pattern, increasing by $1.9 million from the last quarter, solely due to usage. As you will recall, in 2010 we entered into an outsourced processing arrangement with a third party that will pay, analyze and purchase energy for our Company. The initiative became fully operational during the first quarter.

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 have stated before, we expect to see a reduction in our consumption of utilities and resulting expense in 2011 as a result of these initiatives.

Turning to our ancillary businesses, the rehabilitation hospitals generated a first-quarter EBITDAM loss of $1 million. Although hospital revenues were up $1.6 million or 6.5% compared to last year, primarily due to increasing third-party insurance provider rates, they were offset by a decrease in occupancy, which decreased slightly from 54.7% to 54.3%. Hospital expense as a percentage of revenues decreased 34 basis points due to lower relative salary, benefit and operating expenses. Our pharmacy operations achieved a $448,000 margin in the quarter, and pharmacy revenues were down 1.2% compared with last year. However, pharmacy expenses decreased 70 basis points from the prior year.

During the quarter general and administrative expenses increased $523,000 or 4% from last year, primarily due to wage increases. Our G&A costs as a percentage of revenues remained at 4.4% and are within our range of expectation. Rent expense increased $954,000 or 2% compared to last year with most of this increase due to new capital purchased from senior housing of $1.1 million. Income tax expense for the quarter was $379,000.

Now let me review our liquidity, cash flows and selected balance sheet items. Cash provided by operating activities in the first quarter of 2011 was $20.4 million. During the first quarter we invested $13 million in cash deposits for acquisition and we repurchased a small amount of convertible debt for a total outlay of $604,000. At March 31 we had cash and cash equivalents of $26 million. We had drawn $5 million on our $35 million revolving line of credit; and, to our knowledge, we are in full compliance with all material covenants. Today our balances remain undrawn.

Consolidated EBITDA increased 17% to $10.5 million from $9 million last year. We made $13.1 million of capital investments during the quarter and sold $10.8 million of capital improvements to senior housing. Our accounts receivable management remains strong as the number of days sales outstanding for the consolidated operations was 20.3 days at March 31, which remains very low and well controlled.

At the end of the first quarter we had $201 million of net property and equipment, which includes the 24 unencumbered properties directly owned by Five Star. We had $37.3 million of convertible senior notes and $7.7 million of long-term HUD mortgages outstanding now included in discontinued operations. We believe we are in compliance with all material terms of our credit, note and mortgage agreements.

In closing, we remain focused on increasing our occupancy. And as Bruce has noted, we are taking active steps by making investments in marketing and sales initiatives to do so. We continue to invest significantly in the capital upkeep of our properties and have rewarded with an average comparable community rate increase of approximately 3.2% over the last seven quarters. 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 for questions for Bruce and I. Thank you.

(Operator instructions) Joel Ray, Davenport.

I was wondering if you could quickly recap again -- I apologize; you had indicated -- I think you had said 750 units were potentially being acquired in the Midwest. Could you repeat the specific details you have available on that for me?

We didn't really say much, Joe, on that deal because we still are in diligence and (inaudible) confidentiality agreement. It is a deal that we are buying, in excess of $100 million, about 750 units and it's located in the Midwest state. Just generally, the properties fit within Five Star's acquisition strategy. They are newer assets, predominantly private-pay, independent assisted living. That's about all we can really say right now.

Right, but the point is it's about a $100 million transaction is what you had indicated?

Correct, yes.

Okay, fine. I had missed that. In addition, is there any other incremental information available on the Arizona property? It sounds like a nice occupancy rate involved here and an up-to-date facility.

Correct -- beautiful property, it's well run, located in Prescott, Arizona in an area called the Dells. One thing that we like about the property and why we are acquiring it is the land for expansion; it has about 10 acres of land for expansion and we will look to start something on that in the coming years. So it should produce a nice return to Five Star and its investors.

Well, great. In addition, as far as the senior housing property trust timing, you had indicated -- I think you had said, over next couple of quarters. Is it all coming at once vis-a-vis the 20 properties, or is this coming in parcels?

It's still being worked on right now. It's advantageous for Five Star if we can do it all at once to do it all at once, just do the licensing and debt assumptions, really, on senior housing's part, when you're not sure we can close all at once. So it might be a staggered close. But again, those are details still being worked on right now.

Okay, next, you obviously -- and I would agree -- are focusing on building occupancy. You said you have a new senior executive involved there. I was wondering if you could talk to us a little bit about any of the plans currently in place, trying to focus on occupancy, because it seems like it's still deteriorating a bit -- not fast, but certainly not as firm as we would like to see it yet.

No, no question, and that's really why we've made significant investments in that area. The person we've hired has considerable experience in sales and marketing. She has about 20 years, the majority of that dedicated to senior living at large companies. (inaudible) Five-Star she actually came from another public company. We are expanding our regional teams, as I said in my prepared remarks.

We are happy with where the inquiries are right now. We are not happy with where we are closing those deals. So one of the things we really need to focus on is enhancing our sales training, really creating a sales culture, a closing culture, here at Five Star, how we get those inquiries to tours and tours to deposits, etc., and get them in our communities. And that's a really large focus. I think we do a good job, like I said, of getting -- sourcing those inquiries and getting them in. It's how we take those next steps and close that up. And that's one of the things we're working on.

I do want to point out -- Paul just pointed out to me, I had a misspeak when I said 86.2%; we're actually at 85.2% as of yesterday. So, I (multiple speakers).

Ah, well that's good to note. Next, are you (technical difficulty) --

It looks like his line disconnected. (Operator instructions) Jerry Doctrow, Stifel Nicolaus.

So I wanted to step up and ask a little bit broader question, if I could. Obviously, a lot of stuff going on, the [first] (inaudible) transaction coming. You've committed now to buy a number of properties on your own. And you're also shedding some assets. So if I'm trying to just think about Five Star in totality or strategically what you are trying to do. Are you acquiring -- I guess I'm trying to just understand maybe the rationale behind some of this. Are you acquiring in certainly concentrated geographic areas? Is it certain property types? What does the Company look like we are trying to build?

Sure, that's a good question. I think over the years we've said we'd always like to own more assets. I think when the [Redea] transaction or the ability to do that came along, we said we always had three legs of the stool, at that point, available to us -- traditional sale/leasebacks, potentially management contracts and owning our own assets. We've always owned a number of assets; we've increased that over the last two years, where today we own about 10% of our assets.

Looking at Five Star long-term, if we had a [30-inch] bucket, and it might take us a long time to get there, I think that would be a nice place for us to be. We are obviously looking at assets that Five Star is buying. Obviously, every deal we look at is going to make sense and make money for us from the get-go. A lot of the stuff that we are buying and we've bought over the last two years are assets that we can significantly enhance the platform.

Now, if you look at the Arizona property, for example, again, that's a property where we get land for expansion, and we will be looking to add to that portfolio. That's a lot we've done over the past assets that we've owned. So again, looking at it long-term, the strategy of 30 into those buckets, I think, would be a reasonable expectation.

And again, in terms of ones you own versus ones you, say, lease or manage are primarily where you see, whether it's turnaround or some sort of value enhancing proposition rather than a stabilized --

Yes. It's not only, obviously, for the potential of the upside in return for our shareholders. But again, we do want to just take the entire portfolio and build the Company, not just from a standpoint of quantity but quality of asset and revenue. And I think the other comment on the shape of the Company would be, again, as we announced fourth quarter and now first quarter, we are divesting five skilled nursing facilities. Again, we are trying to slightly alter and moderate to reliance on third parties and continue to focus on the core business of senior living.

And in terms of, say, preference for IL versus AL, it's not that, it's more sort of just asset quality and where it's located geographically?

That's right.

Okay. And then just a couple other things -- so in terms of the satellites and I think you also mentioned this new unit you had opened, in terms of IRFs, any sense as to the impact of some of that stuff either in terms of quantity or timing of when we would start seeing it improve some of the operating fundamentals maybe at the rehab hospital?

Sure, yes, I think those two initiatives that we talked about in my prepared remarks -- timing, the TBI unit in Woburn, we should expect to see some stuff second half of this year, probably closer to the fourth quarter. That new inpatient satellite, you are probably looking at first quarter to maybe second quarter of next year, we see some tangible results. Both those initiatives should add over $1 million plus to our bottom line at that hospital. It doesn't get us fully out of the red, but it sure helps us move in the right direction.

And in terms of -- and I guess you mentioned rate increase. Anything else going on fundamentally there? Have the improvements -- I know you are renovating wings and that sort of stuff. Where does that stand? Is that stuff all done at this point?

For the most part. We still have at each hospital two wings that are vacant. We are trying to figure out what's best to do with them right now. Is it to lease them to third parties for another use? Is it to, perhaps, open up an [LPAT] unit on our own? That's definitely two opportunities we have. We also are looking at moving another one of our inpatient satellite units as well; that's in discussions now. That will take some time. And then, obviously, the long-term strategy, as I've always said, is the excess licensing capacity we rent out to those third-party host hospitals. We've got three; I'd love to get two more. That would really bring us to the black and comfortably in it.

We beat the bushes a lot. Nothing has really kind of shaken loose so far yet to date, and we continue to try.

And so, thinking about these moving towards breakeven, say, early 2012 -- is that the right take-away from your remarks?

I think so.

Okay. And there was a little bit more CapEx sales, I guess, to S&H, if that's the right way to say it, $10.8 million. Just trend line there in terms of maybe your CapEx investment and what might go to S&H? It was just up a bit.

No, Jerry; it was really timing. Our full-year expectation on capital remains in the mid-$50 millions, which is identical to last year -- again, it's just timing.

Okay, all right, thanks, I think that's all for me.

At this time there are no further questions coming from the phone lines. I'll turn it up back over to Mr. Bruce Mackey for closing remarks.

Thank you and thank you all for joining us on today's call. We will be at the GMP Securities Conference in San Francisco in May and the Jefferies Healthcare Conference in New York City in June. We hope to see some of you there or at one of those more events. Thank you.

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