Alerislife Inc (ALR) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Five Star Quality Care third-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, sir.

Thank you, Paul, and good morning everyone. Joining on today's call are Bruce Mackey, Five Star's President and CFO -- CEO; Paul Hoagland, Five Star's Treasurer and CFO; and Five Star's new Chief Operating Officer Scott Herzig.

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 the prior written consent of Five Star.

Before I 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 other securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, October 29, 2012.

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 not to place undue reliance upon any forward-looking statements.

Before I turn the call over to Bruce I want to take a moment to explain some of the changes we made to the supplemental information contained in our press release. The first major change was based on feedback we received from investors and analysts who asked for more transparency around our core Private Pay Independent and Assisted Living business. Within our Senior Living segment we broke out three distinct areas which include Private Pay, Independent and Assisted Living Communities, Continuing Care Retirement Communities or CCRCs, and standalone Skilled Nursing.

The second change we made this quarter was the addition of operating trends for our managed communities. Since 2011 we have begun to manage communities in addition to leasing and owning communities. We consider this a growing and important part of our business and understand that it is necessary to provide investors with information to evaluate it. We hope that both of these changes help investors and analysts better understand our business.

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

Great, thank you, Tim, and thank you all for joining us on our 2012 third-quarter earnings call.

As Tim just mentioned, we did make some changes to our supplemental reporting that we think are helpful to the investment community to better evaluate and focus on our strong and growing core Private Pay business. We would be happy to answer any questions you may have about these changes during the question-and-answer session of this call.

The third quarter of 2012 marked Five Star's 15th consecutive quarter of profitability with income from continuing operations of $0.07 per share. Income from continuing operations for the third quarter of 2012 included a tax adjustment of approximately $825,000, which benefited the third-quarter provision for income taxes.

In addition, there was an expense for $350,000 attributable to a past period billing adjustment. Taking into account these two items, income from continuing operations was $0.06 per share.

It is important to note that EBITDA adjusted for a nonrecurring items was up an impressive 22% from last year at $11.8 million, and this is in spite of the 11% Medicare cuts enacted last October. We have clearly proved our ability to offset this loss in revenues while continuing to grow our Private Pay [continuing] business and remain profitable.

Moving on. In August we made an announcement that Scott Herzig, formerly a Five Star Divisional Vice President of our Western Division was appointed Chief Operating Officer effective September 4. We are excited to have Scott onboard as our new Chief Operating Officer. He has significant experience in the industry, and because he has been with Five Star for over 10 years he knows our people, our systems and our residents. Scott is well-equipped to help us maintain and grow occupancy.

On a high-level the third quarter was highlighted by a number of transactions, including the sale of the pharmacy business, the additions of substantially more Private Pay Senior Living communities and the agreement to sell two skilled nursing facilities that in total further improved our product mix and lessened our reliance on government funding.

We now derive 75% of our communities' revenues from private -- residents' private resources, and 92% of our total Company revenues now come from Senior Living.

In September we completed the sale of our institutional pharmacy business to Omnicare for gross proceeds of $37.8 million, and recognized a gain on the sale of $23.3 million. The proceeds we used to repay the outstanding balance on our $150 million revolving credit facility.

The Five Star management team worked diligently over the last year to finalize and close on this transaction. We think it is a significant milestone and help simplify the Five Star story for investors. The sale also reduces our government exposure -- reimbursement exposure, increases our margins, and improves our liquidity position that will allow us to acquire additional Private Pay Senior Living communities on our own balance sheet.

We had some substantial acquisition activity during and immediately following the third quarter. Since July 2012 we have begun to manage 10 Senior Living communities with approximately 2,000 units located across six states, increasing our management business on a pro forma basis to 22% of total units.

There are two remaining Sunrise Senior Living communities with 757 units that we expect to begin managing during the fourth quarter. Taking into account our recent acquisition activity on a pro forma basis Five Star operates just over 30,000 units, and we will be the fifth largest operator -- public or private -- of Senior Living units in the country.

According to a 2012 report issued by the American Senior Housing Association, or ASHA, Five Star is now also one of the top 50 owners of Senior Living units in the country.

In October we entered an agreement to sell two skilled nursing facilities located in Michigan with 271 units, which are dependent on Medicaid reimbursement. Historically they were included in discontinued operations. We are encouraged by this transaction and will continue to look for more opportunities to reduce our exposure to government funding.

In the third quarter our Senior Living business, which includes Independent and Assisted Living communities, continuing care retirement communities, and skilled nursing facilities produced $72.9 million of [EBITDAM]. This is up 3% from last year. Independent and Assisted Living [EBITDAM] grew by the impressive 8% since last year.

We now report occupancy and average daily rate statistics on our managed communities, which at quarter-end included 30 senior living communities with approximately 4,500 units, the vast majority of which are private pay.

Our occupancy for the third quarter was 87.4%. Management and fee revenues have grown 250% to $1.3 million since the third quarter of last year, and we expect additional growth in this revenue line next quarter from our recent acquisitions.

We don't have comparable same-store data yet at this point, but as we continue to grow this business we will discuss the operating results on future earnings calls.

Moving onto our rehabilitation hospitals, which account for 8% of total revenues, they generated $2.6 million of [EBITDAM] during the quarter, which is up about 1% from last quarter. Occupancy was up 100 basis points to 60.7%. [EBITDAM] for the third quarter is down about 13% from last quarter, however, our year-to-date [EBITDAM] is up 5% over last year.

As you may recall, [EBITDAM] from our hospitals increased by 28% for the full year of 2011. We are continuing to make and hold on to our recent performance improvements.

We are remodeling a traumatic brain injury unit at our Braintree Hospital, which should be completed in the fourth quarter of this year. We are also working on opening a new transitional care unit at a New England rehabilitation hospital, which we hope will be fully functional in late 2013.

In summary, we gained positive traction this quarter with regards to several items. First, we saw growth in both our overall and same-store occupancy results compared to last quarter. More importantly, our core Independent and Assisted Living communities grew occupancy by 40 basis points since last quarter.

Second, average daily rate for our core, Independent and Assisted Living communities was up 1.2% from last year. Third, other Senior Living operating expenses were down 80 basis points as a percentage of revenue from last year, which is proof that we been focused on and successful in controlling costs,

Lastly, EBITDA grew by 22% since last year in spite of the drastic cuts to our Skilled Nursing Medicare rates. We have clearly experienced external growth from acquisitions, but we have also been focused on and grown our same-store business as well.

As we have said before, one of our top priorities is improving occupancy. And as we work diligently to get it back over 90%, which it was prior to 2007, and we will see even greater improvement in our results and in turn shareholder value.

At this point, I would like to turn the call over to our new Chief Operating officer, Scott Herzig, to provide more details on our operating results. Scott.

Thank you, Bruce. Senior Living occupancy was 85.7% for the third quarter, which was down 30 basis points from last year, but up 20 basis points from last quarter. Some of our CCRCs are undergoing capital refurbishment projects that impacted occupancy this quarter, but will be positive in the long run.

Occupancy at our skilled nursing facilities continues to decline in-line with macro industry trends, but we continue to try and make progress toward stabilizing this business. Occupancy at our core Independent and Assisted Living business remained strong at 88% for the third quarter, which is up 40 basis points from last quarter.

On a positive note, total Senior Living admissions were slightly ahead of last quarter and up from the same period last year. Same-store Senior Living occupancy was down 30 basis points from last year; however, it was up 50 basis points from last quarter, which is an encouraging sign. As of last Thursday Senior Living occupancy was 86.2% and Independent and Assisted Living occupancy was 88.2%.

Looking now at our Senior Living average daily rates. Rates are down on an overall and same-store basis, mainly due to a change of mix in our business as well as residents looking for less expensive options. We expect overall annual private pay rate growth in the 2% to 3% range, which has been tempered due to new and existing residents seeking smaller, more inexpensive units.

Our Independent and Assisted Living rates are up 1.2% from last year, and we will continue to push rates where we can.

On a final note, I want to mention how excited I am to be in the COO position here at Five Star, a Company with which I have a long history. The main purpose of this business has always been about providing the highest level of care and services to our residents on a daily basis in each and every Five Star community.

Under my direction I will challenge our executive directors to continually search and find ways to raise the bar in this area. I can also assure you that occupancy growth is another priority, and I think that these two things go hand-in-hand.

I have seen this throughout my career from a quality perspective that residents benefit most from living in a vibrant and well-populated community. To this end I will work to strengthen our sales culture and to continue to provide the best tools available to the field to drive sales and improve occupancy.

We have already made great progress on that front, for example, by continuing the successful implementation of our new CRM system and sales training modules for our sales team to help make them more effective. Anyone who knows our Company knows that Five Star continually invests in our people and our properties to keep them competitive and to help provide the best possible care and services to our more than 25,000 residents every day.

With that I will turn the call over to Paul Hoagland.

Thank you, Scott, and good morning everyone. Thank you for joining us. I will review our year-over-year quarterly financial results for the third quarter of 2012.

Senior Living revenues were $277.6 million, up 0.7 point. This increase was due primarily to the revenues from four communities we began to operate since last year, which contributed $2.6 million of revenues.

Management fee revenues, which are revenues from the 30 Senior Living communities we manage, were $1.3 million for the quarter. And we expect to earn approximately $9 million in management fees annually from the properties that we currently manage, including those we anticipate that we will close on later this year.

Senior Living wages and benefits were $137.8 million, a 1.2% increase from last year. $600,000 of this increase was from the four communities we acquired or leased since last year. Total Senior Living wages and benefits were 49.7% of Senior Living revenues, which was a 30-basis point increase from last year. Other Senior Living operating expenses were $66.9 million, down 2.2% from last year, and represent 24.1% of Senior Living revenues, an 80 basis points decrease from last year.

This decrease was the result of many reductions in many areas, such as supplies, utilities and insurances, and our continuing evidence of the positive operating and financial leverage as we increase our size and buying power.

Moving onto other income statement items. General and administrative expenses during the quarter were $14.6 million, up 1.3% from last year and represent 4.4% of total GAAP revenues. However, G&A when factoring in total revenues for all owned, leased and managed communities was 4.2% for the quarter.

Rent expense was $50 million, up 0.8 point from last year, but flat as a percentage of revenues to our senior and hospital revenues. Income tax expense was $426,000, which is favorable to the first two quarters of 2012. We have trued up our year-to-date tax provision, which was favorably impacted by real employment-based tax credits.

Interest expense was $1.8 million and depreciation and amortization was $6.3 million. I will now review our liquidity, cash flow and selected balance sheet items. Operating cash flows were $13.9 million. We invested $11.9 million of capital into our existing communities and sold $4.2 million of long-term capital improvements. At September 30, 2012, we had cash and cash equivalents of $14.3 million. EBITDA, excluding nonrecurring items, was $11.8 million, a 22% increase compared to $9.6 million last year.

Moving on to the balance sheet. Our accounts receivable management remained strong and as of September 30, 2012, the number of days sales outstanding for our consolidated operations with 17.5 days.

At quarter-end we had approximately $337 million of net property and equipment, which includes the 31 properties directly owned by Five Star, 12 of which are uncovered by debt. We had $24.9 million in senior notes; $46.6 million of mortgage notes payable, which includes $7.6 million related to the discontinued operations.

Our two revolving credit facilities are currently undrawn, so today we have a total of approximately $185 million of capacity.

At the end of the quarter our leverage was 19% of book value and 13% of assets. We believe we are in compliance with all material terms of our credit, note and mortgage agreements.

During the third quarter Five Star continued its performance improvements on many fronts. Our growth in EBITDA is especially encouraging as we continue to improve upon the previous year in spite of the significant CMS rate cut. Our strategy of changing our payer mix to our Private Pay Senior Living as we acquire, lease or manage new properties is very positive to the improvement in our shareholder value.

The completion of the sale of our pharmacy business during the quarter continues to align our focus on our core Senior Living business, and will save us over $1 million in annual interest expense or just over $0.02 EPS. We have added five more managed communities during the quarter and will continue to grow this piece of our Senior Living business, which provides positive operating and financial leverage to our entire portfolio.

We ended the quarter with approximately $185 million of borrowing capacity and are actively evaluating acquisition opportunities and improvements within all areas of our business to increase shareholder value.

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

(Operator Instructions). Darren Lehrich, Deutsche Bank..

A couple of things. I wanted to ask, first of all, about the supplemental reporting and the additional disclosure with regard to CCRC. Just, maybe, if you could spend a moment helping us thinking about how you see that particular piece of your business progressing.

Scott, I think I heard you mention that there are some capital plans that are playing out there, so perhaps you could just expand on that and tell us how you think is going to impact the results over the next year or so.

I will start, Darren. Our Continuing Care Retirement Communities first, they are all rental CCRCs, none of these are buy-ins on that regard. We are always undergoing capital plans at a lot of our communities. A lot of our CCRCs are ones we took over 10 years or so ago, and we've been doing a good job remodeling them over the years and we will continue to do so.

We do have a few more folks right now on our skilled portion of our CCRCs. So if I look at our CCRCs they include about $25 million of skilled nursing, and are about 80% Private Pay and then Medicare/Medicaid -- mostly Medicare. But we are right now -- there is probably about five or six communities undergoing significant Skilled Nursing remodeling.

Two of them, actually, we actually shut down portions of our Skilled Nursing wings as we remodeled them. And what we are really focused on is moving towards where some of them are semi-private going to private rooms where we can, and then trying to focus on that short stay Medicare residents that is coming in for (technical difficulty) or something like that.

Okay, that is helpful. And then the five or six that you are remodeling, just the timeline on getting those completed it sounds like they're a little more expensive projects.

They are. They range anywhere from six months to about a year.

Okay. All right, and then if I could, I just wanted to switch gears a little bit just to the pricing commentary and you, I guess, are shooting for 2% to 3% rate growth on -- you know, with a little bit lower this quarter. I guess I just want to understand how you think you're going to be able to drive a little bit better pricing leverages as we go forward here. And was there anything in the quarter that you thought held back your rate growth?

Nothing significant. As we continue to drive our occupancy in the right direction higher, I think we get more and more powerful rate growth. We do have a pretty formal process here at Five Star where you approve rate, and we have done that for 2013. So I know our in-house residents will see rate growth in that 3% range. And then we will be adjusting the street rates as well.

And then as selective markets become stronger in terms of penetration and occupancy, again, you will see less discounting, so you will probably see even more rate growth down the line.

Okay. And then just last housekeeping item. You mentioned a $300,000 prior period adjustment, Paul, I just want to make sure I knew what that was in the quarter.

Yes, Darren, I already mentioned it upfront. It was a Medicare adjustment that we booked revenues for a prior period that we are reserving right now and being a little bit conservative because we think we might pay that back.

Got it. Okay. All right, stay dry, everybody.

(Operator Instructions). Daniel Bernstein, Stifel Nicolaus.

I wanted to go into the rate growth just a little bit more. Are you seeing widespread trade down from residents across your property types at both IL, AL and CCRCs, or is it isolated to a certain type of unit type that you manage or lease?

It is definitely not widespread, but you do see in some markets where people are being -- they prefer the studios as opposed to the two bedrooms in trying to save some money on a monthly basis. But, in all honesty, you go to other markets and it is the two bedrooms that are the most sought-after units. So you really do see it -- it is different market by market.

But if I had to look Company-wide, the prevalent thing, and again I think the more popular option right now is the more price (technical difficulty) in terms of the other studios or the one bedrooms. I wouldn't say it is widespread.

Okay, and you weren't significantly discounting in the quarter to boost occupancy. It was more related -- anymore drop there or flatness in the rate was really more related to that people again trading down. It wasn't any kind of major discounting program on your part.

Nothing more than you have seen in prior quarters, no, correct.

Okay.

The discounting -- you can kind of look at the last several years, it is a lot (technical difficulty) now than it was two or three years ago.

Okay. And then on the Skilled Nursing side, there is normal 3Q seasonality, but the occupancy really came down about 70 BPs; rate was down. Was there anything in particular outside of seasonality that accentuated the drop in occupancy and rate for the third quarter on a sequential basis?

One of the -- probably the big thing that we had is a few of those projects that I mentioned on the last Q&A, last questioner, was we do have -- there was some Skilled Nursing units that we completely shut down Company-wide. So we pulled them out of service. But the unit count is still in there, but they have got zero residents because we are remodeling the entire unit. So that definitely had an impact at a few of our locations.

You have an estimate of what the impact might be or -- you know, a couple of basis points of occupancy or a little bit more than than?

It is definitely a couple of basis points. Off the cuff you are probably talking maybe 60 odd residents that I am thinking maybe 60 to 80 potential. But I think a positive here too, so not only are we going to get those back in the system at some point, but these are potentially prior Medicaid residents that were almost opting out of the program, if you well, again focused on a much higher reimbursement Medicare or Private Pay, some other things like that.

Okay, and then on -- I have one question here on the managed communities. What you have reported wasn't exactly same-store, because it went from 25 properties to 30 properties. Do you have any data on same-store sequential performance on the 25 properties that you managed in the second quarter?

We don't that we are talking about right now. I think we will when we finish the call. I can tell you overall we are seeing nice growth in our management business, particularly the Bell properties that we took on in 2011. We have seen some nice growth at a lot of our Vi communities as well. Saw some -- I know you were just at our Chevy Chase community last year, which was down a little bit last year -- last week. That was down a little bit from when we took over, but it is definitely trending in the right section. So I think the overall pool is doing well and it is on a slight, but upward trajectory.

And you still have some properties in the managed portfolio that is, I guess, still under major -- or redevelopment or under major refurbishment, correct?

Correct. We got one or two of the Vi and Bells that are going through major development. And then a lot of the Sunrise ones that we have taken on recently -- and I guess my comments are the pre to Sunrise communities because we are still getting our arms around us. Some of those will have some significant remodeling as well. And we really can't quantify it yet, but we have got -- it is easily one or two in there that could be big projects.

Okay. I will jump off for now. Thank you for taking my call and stay dry.

Mike Petusky, Noble Financial.

I guess a question around the capacity -- I mean, your balance sheet has never been in better shape in recent memory. I guess my question is what are you guys seeing out there in terms of potential M&A, and what does pricing look like, and just any color you can get around that issue. Thanks.

We continue to evaluate transactions, and at all times are looking at a multitude. We have seen a little bit of uptick here in transactions that are under consideration. Pricing really has not moderated. Cap rates are very competitive, but we are cautiously optimistic that we will start investing and deploying our balance sheet capability here as the year ends and the year opens.

All right, so fair to say that in the next say six, twelve months we will be probably -- in your view, at least, as you see it now -- more active than say the last six months or so?

Yes.

That is fair. Yes.

All right, great, thanks, guys.

For closing remarks I will turn the call back over to Bruce Mackey. Please go ahead.

Great, well, thank you all for joining us today. We look forward to updating you on our fourth-quarter and year-end results early next year. 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.