Alerislife Inc (ALR) 2012 Q1 法說會逐字稿

Good day, and welcome to the Five Star Quality Care first-quarter conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, and good morning, everyone. Joining me on today's call are Bruce Mackey, Five Star's President and CEO; and Paul Hoagland, Five Star's Treasurer and CFO. The agenda for today's call includes a presentation by management followed by 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, I would like to state that today's the conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and others securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, April 30, 2012. 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 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 reliance upon any forward-looking statements.

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

Great. Thank you, Tim. And thank you, everyone, for joining us today on our 2012 first-quarter earnings call. For the quarter ended March 31, 2012, we reported our 13th consecutive quarter of profitability, with net income from continuing operations of $0.02 per basic and diluted share.

Included in our results for the quarter were $500,000 of nonrecurring legal expenses, which Paul will discuss during his prepared remarks. Total Company revenues were up 12.5%, to $346 million; and EBITDA was approximately $9 million. 87% of our total Company revenues come from our senior living business, and 75% of those revenues are derived from residents' private resources.

In the beginning of April, we announced that we had closed on a new $150 million revolving credit facility secured by 15 of our own communities, with 1549 units. Drawing on the facility will be [the] interest at LIBOR, plus a spread of 250 basis points. This is in addition to the current $35 million credit facility we have that matures early next year. The benefit of this new facility is twofold -- first, it provides us with much greater financial flexibility; and, second, it signals to the market and investors the quality of our balance sheet and the value of our own communities.

These 15 communities, which were valued by a third-party appraiser at $230 million, are worth significantly more on a per-unit basis than what we paid for them. We own an additional 12 senior living communities, with 840 units that are unencumbered by debt.

The credit facility is led by Citibank and RBC, and has nine participating institutions. Upon closing, we borrowed $47.5 million from the new facility for two purposes. First, to help repay in full the $38 million bridge loan we had outstanding with Senior Housing Properties Trust; and, second, to purchase $12.4 million of our convertible senior notes. We purchased these notes at a 3% discount to part, and will recognize this gain in the second quarter. We used approximately $3 million of our cash on hand as well.

Compared to last year, our acquisition pipeline has been relatively slow, as we haven't seen many opportunities that fit our acquisition strategy; which, to remind you, is focused on stabilized, well-run, private-pay senior living communities in areas where we have a geographic strength of operations. We will continue to be judicious in our approach to acquisitions and expect to see more opportunities throughout the rest of the year.

With that being said, we don't have much new acquisition activity to report now on. But let me briefly update you on where we stand in terms of previously announced activity. In February, we began to manage a 92-unit senior living community in Alabama, which was disclosed on our last earnings call. In March, we began to manage a 252-unit senior living community in South Carolina, which is the last community we have left to manage as part of the large Bell Senior Living portfolio.

We have two additional communities that we expect to manage during the year. The first, which we've previously discussed disclosed, is the last Vi senior living community out of the eight we are currently managing, with 310 units located in New York that we expect to begin managing during the second half of the year.

The second is an 87-unit senior living community located in Missouri, that we expect to begin to manage on behalf of Senior Housing by the end of the second quarter.

Now I'll review some highlights from the quarter. Total senior living occupancy was up slightly on a year-over-year basis, but down on a sequential basis. Total senior living occupancy was 85.9%, up 30 basis points from last year, but down 30 basis points from last quarter. Overall same-store occupancy, at 85.6%, was flat with last year, and down 30 basis points from last quarter.

During the second -- during the quarter, some of our communities experienced severe outbreaks of the norovirus, which clearly impacted occupancy numbers, as did normal seasonality. Like we've discussed in prior years, the first quarter tends to be the weakest with regards to occupancy. As of last Friday, senior living occupancy was 85.8%. Recent industry data published by the National Investment Center for the seniors housing and care industry, or NIC, showed an increase in sequential and year-over-year occupancies. They noted that this is the eighth consecutive quarterly increase in occupancy for the industry. However, they also note that skilled nursing occupancy has been declining for several years. And we have certainly experienced a similar trend in that business.

Like the industry data shows, and as do our results over the last two years show, occupancy is on a slow but steady recovery. We do expect this to continue into the rest of 2012 and beyond. The upside potential for the industry and Five Star continues to be compelling.

Taking a look at some of our sales -- same-store sales metrics, we had over 5000 admissions during the quarter, which is slightly lower than last year, but was offset by fewer discharges. All of this mainly driven by skilled nursing. We experienced net positive admissions sequentially, driven by skilled nursing as well. Our independent and assisted living admissions and discharges have remained relatively consistent during both periods.

Average daily rate declined 3.8% compared to last year, but was up slightly from last quarter. Year-over-year results include the skilled nursing Medicare cuts that went into effect in October 2011. The decline in our rate is mainly due to this loss of revenue. At our private-pay independent and assisted living communities, we plan to push rates between 3% and 4% this year, which is consistent with last year.

Last quarter we told you about our partnership with salesforce.com. We are still in the process of implementing our new sales tracking and reporting platform across the Company, but we now have over 75% of our communities using salesforce.com, up from 25% last quarter. And we still expect to have all of our communities on the system by the end of the second quarter.

Also, the rollout of our new sales training initiative with corporate-level sales trainers to teach the Five Star way at the community level, is almost complete. Over the last four months we have trained approximately 450 sales counselors and executive directors. We've also developed programs to help ensure this training will be ongoing as well.

Our senior living business continues to perform well. In the first quarter we produced $72 million of EBITDAM. This is up from the $70 million of EBITDAM we reported for the first quarter last year, and the$71.3 million we reported last quarter.

Moving onto our ancillary businesses -- our rehabilitation hospitals, which account for 8% of total revenues, generated $2.7 million of EBITDAM during the quarter, which is approximately a $1 million increase from last year. Our Lowell inpatient satellite unit opened last week to rave reviews. As the effort has taken a few years to accomplish, we are very excited to be in our new location.

We have several other initiatives underway to help improve our hospital margins. We have just begun to renovate our traumatic brain injury unit at our Braintree Hospital. And we are also exploring the possibility of putting in a transitional care unit into our vacant wing at our Woburn Hospital. These efforts are in their early stages, and we don't anticipate completion until sometime in 2013.

The institutional sovereignty operations, which make up 5% of total revenues, had a disappointing first quarter, losing $129,000 on an EBITDAM basis. This is down significantly from the $448,000 of EBITDAM produced last year, and the $357,000 made last quarter. Gross margins were down 9.6% from last year, mainly due to the fact that we have a number of drugs that we purchased at brand prices that were reimbursed at a generic rate. We do expect this will improve going forward. While our pharmacies' financial results are disappointing, there are some positives to focus on.

First, we had almost 12,700 customers at quarter-end, which is the highest number we've ever seen. Second, we did a great job of controlling all other expenses, which were down slightly from last quarter. At last, we're in the process of renegotiating our wholesale provider agreement, and expect substantial savings when it is completed sometime during the second quarter.

The first quarter had some very positive developments for our Company. First, we confirmed that our owned properties, which are on the books for $350 million, are well understated from their current fair market value. Second, we greatly increased our financial flexibility by adding a $150 million credit facility. And third, our strategy of acquiring private-pay communities proved to be successful, and largely made up for most of the lost EBITDA from the Medicare rate cut.

We're also taking some additional cost-cutting measures, which Paul will get into in a minute, to help to further improve our performance. The most important thing we focus on every day is to work on occupancy increases that will bring additional revenues, the majority of which will flow to our bottom line.

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

Thank you, Bruce, and good morning, everyone. And thank you for joining us today. I will now review our year-over-year quarterly financial results for the first quarter of 2012. Senior living revenues were $276 million, up 5.2%. This increase was due primarily to the revenues from 13 communities we acquired or leased since last year, which contributed approximately $13 million of revenue. Management fee revenues, which are revenues from the 25 senior living communities we manage, were $1.1 million for the quarter and in line with our expectations. We expect to earn $5.5 million in management fees annually from the properties that we currently operate and are scheduled to close on during the year.

Senior living wages and benefits were $138 million, a 6.6% increase from last year. $4.2 million of this increase was due to -- from the 13 communities we acquired or leased since last year. Total senior living wages and benefits were 50.1% of senior living revenues, an increase of 70 basis points. 30 basis points of this increase was due to labor cost increases and partially attributable to overtime costs associated with the norovirus that some of our communities experienced early in the quarter. 20 basis points was due to increases in state unemployment insurance taxes. And another 20 basis points was due to an increase in employee health benefit expense. However, on a sequential basis, employee health benefit expense was down from the fourth quarter by 40 basis points.

Other senior living operating expenses were $67 million, up 6.3%, and represented 24.2% of senior living revenues, a 20 basis point increase from last year. The main drivers of this increase were as follows -- $3.2 million from new communities that we acquired or leased since last year; a $700,000 increase in property insurance; a $500,000 increase in marketing costs; and, lastly, a $450,000 increase in bed provider fees, which were partially reimbursed for Medicaid. Utility expenses were down 20 basis points from last year. However, sequentially, it was up 50 basis points, due to the normal and anticipated seasonality of utilities.

Turning to our ancillary businesses, our rehabilitation hospitals generated $2.7 million of EBITDARM, which is a 70% improvement over last year. Total hospital revenues were $27 million, up 4.5% compared to last year, primarily due to the higher quality patient case mix. Occupancy for the quarter was 60.4%, a 40 basis point decline from last year, and a 100 basis point decline from the last quarter.

Our institutional pharmacy operations generated $19 million of revenues, down 3.7% from last year. We lost a total of $129,000 of EBITDARM during the quarter. We experienced an unfavorable cost of goods sold margin, resulting from the continued migration from branded to generic scrips, which we do expect to improve during the second quarter. We serviced approximately 12,700 beds at quarter's end.

Now moving on to other income statements items -- general and administrative expenses during the quarter were $15.5 million, up 13% from last year, and representing 4.5% of total GAAP revenues. As previously mentioned, our external legal expenses for the quarter were $500,000 higher than the previous year, and associated with one-time, nonrecurring legal matters.

Adjusted for actual revenues from our managed communities, our G&A was 4.3% for the quarter. Rent expense was $50 million, up 5.7%, mainly due to approximately $2 million of additional rent from the six communities we began to lease during the year. The provision for income taxes was $600,000, which is an overall increase, as a result of the elimination of our tax valuation allowance last quarter. Our cash tax rate remains at approximately 11%.

Interest expense was $1.4 million, and depreciation and amortization was $6.3 million. All of these items were in line with our expectations, and as a result of our growth in 2011.

Now I'd like to review our liquidity, cash flow, and selected balance sheet items. Operating cash flow was approximately $7 million. We invested $30 million of capital into our existing communities, and sold approximately $6 million of long-term capital improvements. At March 31, 2012, we had cash and cash equivalents of $27 million.

As a subsequent event to our first quarter's results, and on April 13, we closed on a new $150 million revolving credit facility, and simultaneously borrowed $47.5 million to help repay our $38 million bridge loan with Senior Housing and to repurchase $12.4 million of our convertible senior notes at a 3% discount to PAR. As of today, we have nothing outstanding on our $35 million working capital credit facility.

Consolidated EBITDA, excluding certain items, is $8.9 million, compared to $10.8 million last year. We lost approximately $4 million of EBITDA from skilled nursing Medicare cuts during the fourth quarter. So, we've been able to make up for most of that loss with additional revenues from our new communities we took on last year. We still had two managed communities left to close on in 2012; which, again, in total, will provide approximately $5.5 million of annual EBITDA from our managed communities that we currently operate and are scheduled to close on. And we have taken additional cost-cutting measures to further improve our performance as we go forward.

We recently reduced payroll by $2 million annually. And we will also be realigning certain of our benefits to mirror best practices, which will save us an additional $1 million annually.

Moving on to our balance sheet -- our accounts receivable management remained strong. And as of March 31, 2012, the number of days sales outstanding on our consolidated operations were just under 19 days. At quarter-end, we had approximately $354 million of net property and equipment, which includes the 31 properties directly owned by Five Star. 12 of which remain unencumbered by debt.

We had $37 million of convertible senior notes; $39 million of mortgage notes payable; and $30 million outstanding on our bridge loan with Senior Housing. As previously mentioned, subsequent to the quarter's end, we've repaid the total balance on the bridge loan with Senior Housing, and repurchased $12.4 million of convertible senior notes.

At the end of the quarter, our leverage was 40% of book value and 20% of assets. We believe we are in compliance with all material terms of our credit, note, and mortgage premiums.

Over the past year, Five Star has made some major changes to strengthen its long-term value and viability. We increased our core, private-pay revenues to 75% of our senior living business. And we now operate and manage over 27,000 units, a 24% increase. 80% of our units are independent living, assisted living, and memory care, virtually all private-pay. Having experienced a significantly negative impact from the 11% skilled Medicare rate reduction, along with the industry, we have made up for most of the estimated $16 million to $17 million of lost EBITDA through our growth.

We just closed on a new $150 million revolving credit facility, which we will use to continue to increase our private-pay mix. Our focus on building occupancy and aggressively managing margins will allow us to benefit as our occupancy improves.

With that, Bruce and I would now like to take your questions. Thank you.

(Operator Instructions). Daniel Bernstein, Stifel Nicholas.

So I just want to go over the occupancy, quarter over quarter. When I isolate the assisted living and independent living, it looks like it dropped about 50 bps points quarter over quarter. So can you talk about the impact from the Norwalk Virus? Whether that occurred earlier in the quarter and how it affected the averages? And maybe what your ending occupancy is, for just the private-pay senior housing.

Sure, I'll start with that. It did affect us really early in the quarter. January was definitely the month hardest hit. We were still hit in February. And it did carry a little bit to March. To put it into somewhat of a perspective, I think we had 35 communities at one point or another that had closures at some points; just basically banned of admissions just due to the Norwalk virus.

And I think it impacted, we calculated, about 400 and -- roughly 430 days that -- the number of communities had a number of days that we couldn't -- but like I said, it was predominantly in January; got better in February; got better in March. I know I would put our overall occupancy as of last week was 85.8%, so it definitely -- we did hit a low point out that probably 85.7%, 85.6% overall; got up to about 86%, but we've been within that 10, 20 basis points where we average the quarter.

Okay, so standing occupancies is just higher than the average.

Correct.

Okay. And what was the cost again for the quarter in terms of -- I think Paul went over some of the impact on the expense side.

Well, one thing we did mention was -- if you're referring to the non-recurring legal expenses in our G&A -- we had approximately $500,000 in Q1 associated with various litigation matters that were one-time nonrecurring.

I thought you mentioned something about the Norwalk virus as well.

Well, actually, we did obviously talk about it. We've not quantified the exact impact. Although we saw itself manifest itself not only in the occupancy; we saw a little bit of an uptick in labor costs as a result of, basically, overtime. Because, unfortunately, the way the virus works is, as a community would have it, employees that have it as well are not able to return to work. And then the facility itself has to be fully sanitized before it can be reopened for admission.

So there is an inefficiency in it. And, again, we don't obviously broadcast our profitability by month. But January was a negative month for us, and February and March were sequentially much better.

That's very helpful. And then the -- you talk about the value of the assets that were encumbered in the quarter. Are the unencumbered assets generally similar in quality? If I wanted to extrapolate value of the ones you encumbered to the unencumbered ones?

I'd say more than half are; yes, Dan, there's a few in there. You might recall, we took over some of those properties from Sunwest -- I think we probably paid about $70,000 a unit, and that was back in 2008 -- that we are still in the process of getting those up to par with where the rest of our assets are. So I'd say more than half are on par with what we've done. And then the others are close. But there are two or three that are stragglers.

Okay. And then the at last question I have is on the acquisition pipeline. You said that it's been a little slow this year so far. And why would you expect that to ramp up as the year goes? Do you have a sense of that pipeline? Or do you have any letters of intent out, to go head and perhaps purchase assets? I just want to understand, how are you thinking about that pipeline going forward?

Sure. In all honesty, I just think, really, the activity from the brokers has kind of picked up a little bit over the last month or so. We're still on pace to do two right now. We've looked at a few deals. But I'd say the number of deals that fit our strategy has picked up a bit. And we are doing more tours of properties. We signed more CAs. So it does seem to be a little bit busier now than it was back in January, February.

Do have a sense of what the dollar volume might be that you're hoping to close this year?

Realistically, somewhere north of $100 million, but it's really tough to put a figure on that. And when I say -- that's obviously taking the kind of strategy of working with Senior Housing. How much we'll actually take on our own balance sheet right now, I don't know. But we look very hard, but we really -- we do whittle it down to what is really going to meet our strategy. And we do pass on most, but there are some things that rise to the top.

Okay, all right. I appreciate you taking my questions, I'll jump off. Thank you.

And there are no further questions at this time. I'll turn that call back to Bruce Mackey.

All right. I'd like to thank everybody for joining us today. I do understand that some people had trouble getting into the call before this morning. So we're sorry about that, and we'll work with AT&T to ensure that that doesn't happen in the future.

We are planning to attend the Deutsche Bank Healthcare Conference in Boston in May, and the Jefferies Global Healthcare Conference in late -- in June -- in New York in June, I'm sorry. We look forward to many meeting many of our investors and analysts at either of these events. Thank you again.

Thank you. And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.