Alerislife Inc (ALR) 2012 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Five Star Quality Care Second Quarter 2012 Financial Results Conference Call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead.

Hello, this is Tim Bonang. 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 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, 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 others securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, August 1st, 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 not to place undue reliance upon any forward-looking statements.

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

Thank you, Tim. And thank you all for joining us today on our Second Quarter Earnings Call.

Since we last spoke with you in late April, we've been very busy working to continuing to strengthen Five Star's position as a premier provider of private-pay senior living services. In particular, there were three events that I believe are significant to our long-term private-pay focus.

The first event occurred in late May, when we announced a settlement in our long-running litigation with Sunrise Senior Living. This litigation related to excess insurance charges by Sunrise on 31 communities that were managed by Sunrise on behalf of Five Star prior to 2007. As part of the settlement, Sunrise agreed to pay us $4 million.

The second event also occurred in late May, when we reached an agreement with Sunrise whereby they will terminate their leases for 10 senior living communities leased to them by Senior Housing Properties Trust, or S&H. And we will begin to manage these communities for S&H's accounts.

The communities include 2,472 living units and are located across six states. They generated gross revenues of approximately $115 million in 2011. The management contracts have similar terms to the ones under which we currently manage for S&H, including a minimum annual management fee equal to 3% of gross revenues, plus an incentive fee equal to 35% of annual net operating income after S&H receives return equal to its 2011 rents from Sunrise.

These communities will initially add approximately $3 million of annual management fee revenues to Five Star. In addition, all 10 communities fall within our current footprint where we offer rehabilitation and wellness services, which should drive additional revenues to Five Star. We expect to begin managing these 10 communities before the end of 2012 after all appropriate regulatory approvals are obtained.

The third event took place in July, when we announced that we had reached a deal -- reached an agreement, rather -- to sell our pharmacy business to Omnicare for net proceeds of $39.9 million. It was a fully marketed transaction by the investment bank, Jefferies & Company. We expect this transaction to close in the second half of 2012 after the completion of customary closing conditions, including licensing approvals.

As some of you may remember, we entered the pharmacy business in 2003 under a very different environment, where we contemplated achieving margins in the 10% range. Changes in Medicare billing put great pressure on our margins, as did the switch to using generic scripts. And as a result, despite growing to be one of the 10 largest institutional pharmacies in the United States, our pharmacy has only been marginally profitable over the past few years. However, we expect to generate a gain of approximately $24 million with this sale, which will double our return on investment for our shareholders.

We think this is an excellent return on investment for Five Star's shareholders and sets an example of the overall value we believe can be found in Five Star. The sale also simplifies the Five Star story for investors and allows us to increase our focus on our core private-pay business.

For the second quarter, we generated income from continuing operations of $0.06 per share after excluding a $0.04-per-share gain from the Sunrise litigation settlement, which is $0.04 per share better than income from continuing operations last quarter. Second quarter 2012 also marked Five Star's 14th consecutive quarter of profitability.

EBITDA adjusted for nonrecurring items also improved over the first quarter of 2012 by over 50%, to $13.4 million. EBITDA is also up 6% from last year.

We have talked over the last couple of quarters about the different ways [industry] planned to make up for the lost EBITDA resulting from the recent Medicare cuts in October of last year. And I think our results over the last two quarters have proved our ability to do so.

From a capitalization perspective -- the Company's total debt as a percent of total book capital is only 28%. At quarter end, we had $24 million of cash and cash equivalents, owned 12 unencumbered senior living communities with 840 living units, and had $146 million of availability under our two revolving credit facilities. Also during the quarter, we repaid and terminated our bridge loan from S&H and repurchased $12.4 million of our senior convertible notes at a modest discount to par value.

Now, I will review some highlights from the quarter. Total senior living occupancy was 85.6%, which was up compared to last year but down slightly compared to last quarter. Overall same-store occupancy was flat year-over-year at 85.2%, and also down slightly from last quarter. As of last Friday, senior living occupancy was back up to 86%.

If you look specifically at our core private-pay independent assisted living business, occupancy is up marginally year-over-year and flat sequentially, while skilled nursing trended down. Our occupancy trends are relatively in line with the NIC MAP industry data.

Increasing our skilled nursing occupancy had [no] challenge. We've really seen a shift in the skilled nursing sector. There are more high-acuity, short-length stay patients, which has caused patient turnover to increase. In addition, we have seen skilled nursing patients opting to defer care and also choosing other home- and community-based services, which has impacted occupancy as well.

We are making efforts to improve occupancy in this portfolio by continuing to evaluate the operations and by putting capital into certain properties to keep them competitive. Aside from the macro headwinds, we believe these actions should help raise occupancy in the long run. And, on a positive note, last week, CMS announced a net 1.8% increase in Medicare reimbursement for skilled nursing operators starting on October 1st, 2012.

Taking a look at our same-store sales metrics -- we had almost 5,000 admissions during the quarter, which was down 3% from last year. The decline was driven by lower skilled nursing admissions. Our independent and assisted living admissions were actually up year-over-year. Same-store average daily rate for the quarter increased modestly compared to last year but was up approximately 1% compared to last quarter, which indicates that our private-pay rate growth offset the Medicare rate cut in our skilled nursing business.

Our senior living business continued to perform well. In the second quarter, we produced $76.5 million of EBITDAM. This is up 8% from the second quarter of last year and 6% from last quarter. Taking into account the Medicare rate reductions in October 2011, our significant margin growth in our senior living business, both year-over-year and sequentially, is impressive and underscores our strategy of focusing on high-quality private-pay independent assisted living communities, where the majority of revenues come from residents' private resources.

Moving on to our relocation hospitals, which accounted for 8% of total revenues and generated $2.5 million of EBITDAM during the quarter, which is down from last year and last quarter -- occupancy was down from last year to 60% from 62%. Our [room-in] location had positive results, primarily driven by our new Lowell inpatient satellite unit that opened up a few months ago. The new Lowell unit is on track to meet our budgeted expectations.

However, these positive results were offset by lower-than-expected performance at our Braintree locations, which suffered from a less-than-favorable patient case impairment during the quarter. We're currently working to renovate our Braintree hospital's traumatic brain injury unit, which we feel will help make them more competitive.

We expect the renovations to be completed in the next several quarters. In addition, [those] hospitals will get a net 2.1% Medicare rate increase effective October 1st, 2012.

Our second quarter results proved our ability to grow earnings following a year of significant growth through acquisitions and the Medicare rate cuts that negatively impacted our bottom line. We have an additional opportunity to grow cash flows when we take on the management of the 10 Sunrise properties later this year.

Our balance sheet is in great shape. And with the proceeds we plan to receive from the sale of our pharmacy business, we will pay down existing debt. Our focus has been and will continue to be on growing our private-pay senior living business. Our total unit count is edging closer to 30,000 units, which makes us one of the top players in the senior living marketplace.

We are focused on keeping our properties well run and recognized in the local communities. And, most importantly, we are focused on increasing our occupancy, which is the main driver of our bottom-line growth.

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

Thank you, Bruce. And good morning, everyone. Thank you for joining us today. I will now review our year-over-year quarterly financial results for the second quarter of 2012.

Senior living revenues were $278 million, up 4.8%. This increase was due primarily from the revenues from the 13 communities we acquired or leased since last year, which contributed $10.3 million of revenue. Management fee revenues, which are revenues from the 25 senior living communities we manage, were $1.3 million for the quarter and in line with our expectations. We expect to earn $8.8 million in management fees annually from the properties that we currently operate or are scheduled to close on during this year.

Senior living wages and benefits were $137 million, a 2.7% increase from last year. $3.3 million of this increase was from the 13 communities we acquired or leased since last year. Total senior living wages and benefits were 49.1% of senior living revenues, a decrease of 100 basis points from last year. Thirty basis points of this decrease was due to decreased labor cost, 10 basis points was due to a decrease in state and federal unemployment insurance taxes, and 40 basis points were due to a decrease in both health benefit expense and worker's compensation expense. However, on a sequential basis, employee health benefit expense was up 20 basis points.

Other senior living operating expenses were $66 million -- up 7.8% -- and represented 23.8% of senior living revenues, a 60-basis point increase from last year. The main drivers of this increase were as follows -- $1.4 million from new communities we acquired or leased since last year, $1.1 million from property taxes, partially due to credits that we received of approximately $580,000 in Q2 of 2011; $1.1 million of increased bed provider fees, which were partially reimbursed from Medicaid; and $300,000 in additional marketing and room turnover-related costs.

Lastly, utility expense was up 10 basis points from last year. However, sequentially it was down 60 basis points due to a milder spring felt throughout the US.

Our rehabilitation hospitals generated $2.5 million of EBITDAM, a 13% decrease from last year. Total revenues were $26 million, flat when compared to last year. But due to both a combination of higher-quality patient case mix and an offset for the decrease in occupancy and an increase in Medicaid case mix, margins were impacted. Occupancy for the quarter was 59.8%, a 200-basis point decline from last year and a 60-basis point decline from last quarter.

Moving on to other income statement items -- general and administrative expenses during the quarter were $15.4 million, up 9% from last year, and were 4.4% of total GAAP revenue. There was approximately $550,000 of one-time nonrecurring legal expenses in the current quarter when compared to the previous year.

Adjusted for actual revenues from our managed communities, G&A was 4.2% of revenues. Rent expense was $50.3 million, up 5.1%; mainly due to $1.6 million of additional rent from the six communities we began to lease during the year. Provision for income taxes was $3.8 million, which is a significant increase over last year, and is primarily as a result of the elimination of our tax valuation allowance in the fourth quarter of 2011, and in part due to the taxes on the gain and settlement we reported in the current quarter, which resulted in a tax expense of $1.5 million for the gain.

Our cash tax rate remains at approximately 11%. Interest expense was $1.6 million, and depreciation and amortization was $6.7 million. All of these items were in line with our expectations as a result of our recent growth.

I'd like to now review our liquidity cash flow and selected balance sheet items. Operating cash flows were $23.4 million. We invested $15.5 million of capital into our existing communities and sold $7.8 million of long-term capital improvements. At June 30th, 2012, we had cash and cash equivalents of $23.6 million.

Consolidated EBITDA, excluding certain items, was $13.4 million, compared to $12.7 million last year. We lost approximately $2 million of EBITDA from skilled nursing Medicare cuts during the quarter. So we have been able to make up for some of the loss of additional revenues and favorable case mix. In addition, we did take other cost-cutting measure early in Q2 that favorably impacted our performance.

We still have 13 managed communities left to close on in 2012. And taking those into account along with the 25 communities we currently manage equates to $8.8 million of annual management fee revenues.

Moving on to the balance sheet -- our accounts receivable management remains strong. And as of June 30th, 2012, the number of days sales outstanding for our consolidated operations was 18.5 days.

At quarter end, we had approximately $338 million of net property equipment, which includes the 31 properties directly owned by Five Star, 12 of which aren't covered by [GAAP]. We have $24.9 million of convertible senior notes; $26.9 million of mortgage notes payable, which include $7.6 million related to discontinued operations. And there is $37.5 million outstanding on our $150 million revolving credit facility. We had nothing outstanding on our $35 million working capital facility.

At the end of the quarter, our leverage was 28% of book value and 19% of assets. We believe we are in compliance with all material terms of our credit, note and mortgage agreements.

Over the past year, Five Star has made major changes to strengthen its long-term shareholder value and viability. We have increased our core private-pay revenues to 74% and now operate and manage over 27,000 units, a 14% increase. 80% of our units are independent living, assisted living and memory care -- virtually all private-pay. Having experienced the significantly negative impact from the 11% skilled nursing Medicare rate reduction, we have made up for all, if not most, of the estimated increase or loss of -- $16 million to $17 million of lost EBITDA through our growth and margin management.

We announced the sale of our pharmacy business, and we primarily used the proceeds to repay the outstanding balance on our $150 million revolving credit facility. Our focus will remain on building occupancy, increasing rate and aggressively managing margins to continue to be profitable and to grow our private-pay business.

With that, we'd like to open it up for questions. Thank you.

(Operator Instructions) Art Henderson, Jefferies.

Bruce, I'm sorry, I jumped on a little later than the end of your opening remarks. Could you talk a little bit about your views on occupancy -- kind of where it is in the assisted living side -- and what you're seeing out there, and where you expect it to go?

Sure. Just looking at pure ILAL -- it's been trending nicely over the last several months. It was flat quarter-over-quarter, but we've seen it trend up over the last month or two. I'd say it's fairly in line with the NIC MAP data. Our AL, I think, is pretty strong -- maybe 10, 20 basis points up. Little bit lower in the IL, and that's a lot of the stuff that we've taken over recently, and we're working on moving that up.

A lot of the indications from the housing sector seem positive. So I'm buoyed by that, and I'm hopeful that that will help us out. And we're also still continuing to put a lot of efforts in our sales and marketing efforts here at Five Star. We completed our full conversion to our sales force marketing system, our CRM system, in the second quarter. So really, our third quarter, we'll have a full quarter of just data from one system.

And again, having that data -- if you've got the data to measure it, you can help improve it over time. So we're really hopeful that that will have a big part of it. And then, continuing to improve our sales training focus across the Company is a big part of it as well, and making sure that we get the right people in the right jobs across the Company.

So I'm pretty hopeful of what we should be able to do in terms of driving that occupancy over the next several quarters.

I know you obviously don't give out guidance, but just in terms of just how we should be thinking -- should we expect just an incremental sort of rise in the occupancy, or should we kind of -- with the -- I'd say the housing data as well, but just the broader economy and the weakness that we're seeing there -- is it kind of -- you'd be happy with a stabilized number? Or do you kind of feel like we should feel comfortable kind of tweaking that a little higher as we move forward?

Yes, I'm expecting it to tweak a little higher as we move forward. Now, I don't expect large [movement -- just be] what you said -- you're right, the macroeconomic headwinds are there. They continue to be probably be a little bit stronger now than they were two quarters ago. So that will work a little bit against us. But for the most part, we expect it to go up a little bit with everything that we've been doing.

Great.

And then, on your labor -- you've done a heck of a good job there, hammering away on it. Anything specific that you're doing in those -- with respect to those labor costs and the benefits? That looked pretty strong there.

Yes. And I think the main thing is that again, we have a good cost-containment culture. We continue to focus on the outlier buildings from a standpoint of productivity labor management, which has helped us garner the 30-basis point improvement in productivity.

I think the other big piece, too, is our worker's compensation programs. And Five Star invests about $15 million a year in worker's compensation expense. We revamped the administration and management of those programs in early 2011, and we're starting to see the benefits.

Great.

And then, sort of jumping back over -- I heard your comments on the sale of the pharmacy business, and [you] plan on the use of proceeds. Can you just kind of talk about your views on M&A and what the outlook there is, and any detail you can give around that?

Sure. I think to replicate what we did in 2011 is going to be pretty difficult, given that we're halfway through the year. We still have a couple of properties that we've got under agreement right now -- management opportunities that we expect to close over the next several months. Take on the Sunrise -- while it's not truly an M&A deal for us, will be a big deal bringing on those 10 communities, 2,500 units. So that will keep us busy and should be a nice driver for EBITDA going forward.

We continue to still source a lot of deals. We probably sign a CA every week at a minimum. Most of them down pan out. But we've got several things that we're looking at right now, that hopefully could pan out in the fourth quarter or early next year.

Great, thanks. I appreciate it very much.

All right, Art, good talking to you.

(Operator Instructions) Rob Mains, Stifel Nicolaus.

Can you go back -- did I get this right -- the same-store occupancy on senior housing, you said 85.2% -- was that the flat figure versus Q1?

Correct. I think it was down a little bit from Q1, flat from last year.

And same-store was down a little bit as well?

Yes, correct.

Yes --

And again, it's mostly driven -- if you look at our ALIL [data line] -- and we don't break down in the press release, but just behind the scenes -- that was flat quarter-over-quarter and up marginally from last year, probably about 50 BIPS.

Okay. And then, did you say we're 86% as we speak now?

Correct, yes, overall.

Okay. So I guess, to surmise from that is -- and you said you had a couple of strong months -- probably kind of low water mark in the middle of the second quarter -- it's been growing from then?

That's fair, yes.

Okay.

And then, on the two rehab hospitals -- I don't want to belabor 8% of revenues -- but the decline in margins -- we should attribute that to Braintree?

The low -- yes, this quarter, we saw a little bit of pullback in margin from the first quarter, primarily from our Braintree relocation. New England was up, driven primarily by our new Lowell inpatient satellite -- that was a nice driver of growth. But in Braintree, we saw a little bit of -- a little lower Medicare mix, in terms of the patients and in terms of the DRGs -- the actual case mix was a little lower than what they've seen in the past as well.

The other thing we should take into --

(Multiple speakers) mix issue.

I was going to say, I think the other thing to take into consideration with rehab hospitals is -- last year, 2011, rehab hospitals had EBITDAM growth of about 25% full year. And Q2, for Braintree in particular last year, was a really strong quarter. So again, we're not pleased with performance Q2 of '12. But Q2 of '11 was their strongest performance of the year. And we did have a little bit of noise in there with change in increasing Medicaid business and a little bit of length-of-stay decreases in Medicare.

Okay.

And then, when you look out at 2013 -- obviously, 2% isn't as big a number as 11.1%. But in terms of handling the sequestration reductions -- is that something that's going to necessitate specific strategies like the skilled nursing cuts? Or is that something that you think you can handle kind of as normal course of business?

I think we handle it normal course of business. I think we've shown that we can handle an 11.1% rate cut; we've done that fairly well. So the sequestering cuts of the 2% -- they're going to -- [potentially] that means a flat rate increase, because they're going to give us a 1.8%, and then turn around and potentially take it away come 1/1. So I'm not too concerned about our ability. We'll push our private-pay rates, and that will cover it. We expect to grow occupancy; that will cover it. And then, we expect to continue to manage our expenses in a manner that will help drive our bottom-line growth.

Okay.

And then, last question -- the pharmacy sale, obviously positive -- and Art asked a question about M&A. Looking kind of the other side of M&A, are there any assets, just generally speaking, that you would look to lighten?

Potentially. We've got two skilled nursing assets right now in discontinued. It wouldn't surprise me if another one joined that mix in the short term. But we're always looking. If a property we feel is obsolete in a market, or if a market's turning we don't expect to come back, we take a good, hard look. And over the course of time, we've probably moved out 20 properties, most of them in the skilled nursing side. A few ALs/ILs as well -- that's pretty rare. But we do look at it and manage it pretty well.

Great. That's all I have. Thank you.

Thank you, Rob.

Mike Petusky, Noble Financial.

A few questions -- could you [handicap] chances that this pharmacy transaction closes in Q3 versus Q4 -- is it more likely Q3 closing?

I would say yes.

Okay.

And in terms of, I think -- if you've mentioned on this call, forgive me for asking again -- but I think you had mentioned on the last call you were hopeful for 3% to 4% rate increases in '12. Is that a reasonable expectation still at this point, or is it maybe a little bit lower?

On a pure private-pay on existing revenues, it's going to be in that range.

Okay.

Then, just one more question -- to me, my read between the lines -- and it may not be accurate, but my read between the lines seems like you guys -- the language you're using in terms of M&A opportunities on this call is a little bit more bullish than on the last call. Have you seen a pickup in terms of things that you guys are potentially getting serious about? Or am I reading too much into what I think I'm hearing?

Think you're reading a little too much. We source a lot of deals. I'm fairly certain I said something similar to that last quarter. The deal flow -- it's been slower this year than last year; I will say that overall. But it's still -- we're looking at a lot of one-off transactions, a lot of smaller regional -- three to four assets here and there. Most haven't panned out, I'll be honest with you. A lot of stuff that we're looking at really hasn't lived up to what we consider to be quality assets consistent with what we manage right now in our portfolio.

So really, not any material change since earlier in the year?

That's fair.

All right. Well, very good, guys. Thank you.

Thanks, Mike.

Thank you.

James Gibson, Punch & Associates.

I was hoping you could comment on what you're seeing in terms of pricing of some of the deals. Are you seeing cap rates continue to move lower? And is that trickling down into some of the one-off transactions that you guys have been considering?

Yes, cap rates still are -- they're low. They're probably at a four- or five-year low point right now. We haven't closed on a lot of deals, so it's really tough to say that they've trended significantly lower from last year. Obviously, the one-offs -- you do get a little bit of a break on that; you're not paying for portfolio pricing a premium. But they are low.

How about newly constructed properties? Have you been seeing more of those being completed, or is that still relatively stagnant?

Still relatively stagnant. There are some markets where you do hear about construction taking place. I think it's probably a little bit more this year than last year -- not significantly so, but I would say it's up a little bit. But still, (multiple speakers) when you look at that potential demand in the industry, it's still a fraction of where it possibly could be.

You still there, James?

That answers all my questions. Thank you.

Okay, great. Thank you.

Rob Mains, Stifel Nicolaus.

Yes, I'm sorry. I missed the comment that you had on utilities costs, please.

Yes. Our utilities were sequentially favorable to Q1, which we normally enjoy. They were 10 basis points higher than they were last year. And quite honestly, there was really nothing unusual in that. As you'll recall, last year, 2011, we put a big focus on reducing expenses, and we continue to enjoy lower expenses as a percentage of revenue than we have in years.

So the heat wave that's struck various parts of the country hasn't had a meaningful impact on --

We've not seen anything yet.

Great. Thank you.

With that, there are no further questioners in the queue. I'll pass it back to Bruce Mackey.

Great.

Well, thank you all for joining us today. We will be presenting at the Stifel Healthcare Conference in Boston in early September and hope to see many of you there.

Thank you.

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