Alerislife Inc (ALR) 2012 Q4 法說會逐字稿

Ladies and gentlemen, good day. Thank you for standing by. Welcome to the Five Star Quality Care fourth-quarter and year-end 2012 fiscal results conference call.

At this time all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Vice President, Investor Relations, Mr. Tim Bonang. Please go ahead.

Thank you and good morning, everyone. Joining me on today's call are Bruce Mackey, Five Star's President and CEO; Paul Hoagland, Five Star's CFO; and Scott Herzig, Five Star's COO.

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 off today's conference call is strictly prohibited without the 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 other securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today October 29 -- as of today, sorry, February 15, 2013. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made on 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.

Great. Thank you, Tim, and thank you all for joining us on our 2012 fourth-quarter earnings call. The fourth quarter of 2012 marked Five Star's 16th consecutive quarter of profitability with net income from continuing operations of $0.07 per share. These results are up significantly from the $0.02 per share we reported in the fourth quarter of 2011.

EBITDA, adjusted for nonrecurring items, at $12 million was up an impressive 39% from last year. For the full year 2012 Five Star generated net income from continuing operations of $0.24 per share, total revenues of $1.4 billion, and EBITDA of $46.2 million. At year-end 75% of our senior living revenues came from our residents' private resources and 92% of our total company revenues came from senior living.

During the fourth quarter we were focused on completing some substantial acquisition activity. To remind you, back in May we reached an agreement with Sunrise Senior Living whereby they agreed to terminate leases for 10 senior living communities that they leased from Senior Housing Properties Trust so that Five Star could take over as manager. In total there are 10 communities with 2,500 units located in six states.

We began to manage three communities in September and during the fourth quarter we began managing the remaining seven communities with 2,065 units. Separately, in December we began to manage two additional senior living communities located in Tennessee and Texas with a total of 168 units.

Back in October we entered an agreement to sell two skilled nursing facilities located in Michigan with 271 units. These facilities are included in our discontinued operations. We are working hard to finalize this sale and expect it may close during the first half of 2013.

Recapping our growth in 2012, we took on the management of 16 senior living communities with a total of 3,300 units across 11 states. The management business has been a big contributor to our overall growth this year. We now manage 39 senior living communities with 6,700 units that generated $5.8 million in management fee revenues during 2012.

The benefit of managing communities for Five Star is threefold. We have invested no capital in this business. We expect to generate annual management fee revenue of approximately $9 million from the communities under management at year-end and the majority of this revenue falls to our bottom line.

Now looking at the results of our senior living business, which includes independent and assisted living, continuing care retirement communities, and skilled nursing facilities, we reported $279 million of revenue and $73.8 million of EBITDARM for the fourth quarter of 2012. Revenues were up 1.6% from last year and EBITDARM was up 4.2% from last year. For the full year, our senior living business produced $1.1 billion of revenue, up 3% from last year, and $293 million of EBITDARM, up 3.7% from last year.

Moving on to our managed communities, occupancy for the fourth quarter was 87.5%, up 2.1% from last year. Quarterly management fee revenues have grown to $2.2 million. On a same-store basis we grew managed community occupancy by over 400 basis points from last year.

The rehabilitation hospitals, which account for 8% of total revenues, generated $2.7 million of EBITDARM during the quarter, which is up 8% from last year. On a full-year basis EBITDARM was up 5.4%. Revenues for the quarter were $27.5 million, up 1.7% from last year, and revenues on a full-year basis were $107 million.

Occupancy for the quarter was 60.2%, down from 61.4% last year. During the quarter we completed renovation work at our traumatic brain injury unit in our Braintree Hospital which is currently performing to our expectations. We are also remodeling an additional wing at both hospitals and are still on track to open a transitional care unit at our Woburn hospital by the end of 2013.

In summary, 2012 marked a year of impressive performance for our company demonstrated by the significant quarterly and annual increases in EBITDA. EBITDA for the quarter was up 39% compared to last year and full-year EBITDA in 2012 was up 14% compared to 2011.

In addition to our financial growth, the Company's stock price total return during 2012 was 67%, significantly beating the broad market indices. Our year-to-date total return as of yesterday was just over 25%, certainly a nice bump compared to our peer group and an indication, we think, that investors are starting to see the real value in Five Star.

Although we think these are exciting numbers, our $300 million market cap still does not reflect the tremendous value we have in just our own portfolio of properties which have a net book value of approximately $350 million, significantly above our market cap and far below their fair market value. We believe that by continuing to be diligent in our approach to managing the balance sheet, by focused on growing our private pay senior living business, by continuing to provide high class service to our residents, and by reinvesting in our communities our valuation will be more in line with the true value of our company.

Our plan for 2013 remains consistent with last year. Occupancy growth is still one of our highest priorities. Our occupancy is well below our historical high of over 90%. We did see some impressive growth in independent and assisted-living occupancy over the last two quarters, which was up 40 and 50 basis points, respectively, beating NIC MAP industry results but we have more to do.

We have talked about the strong flow-through from occupancy where a 1% increase equals $10 million in revenue, the majority of which will fall to our bottom line. Increasing rate is another priority and a very powerful agent of revenue growth. Average monthly rate for the quarter was up 2.5% compared to last year and we still expect to grow our private pay rates between 2% and 3% on an annual basis.

And, finally, growth through acquisitions remains central to growing our bottom line. We have discussed the ways in which we can grow through managing communities, acquiring communities on our own balance sheet, or by leasing communities. We have ample capacity to acquire communities on our own balance sheet and continue to look for opportunities to do so, understanding that it makes us a stronger company in many respects.

At this point I would like to turn the call over to Scott Herzig, our Chief Operating Officer, to provide more detail on our operating results. Scott?

Thank you, Bruce. Senior living occupancy was 85.7% for the fourth quarter, which was flat with last quarter and down 50 basis points from last year. However, occupancy in our independent and assisted living communities continued to perform well at 88.5%, which was up 50 basis points from last quarter and up 20 basis points from last year.

If you look at our occupancy results compared to the NIC MAP 31 quarterly industry dataset provided by the National Investment Center for Seniors' Housing and Care, their report indicates that during the quarter independent living was up 10 basis points, assisted living was up 20 basis points, and skilled nursing was down 10 basis points. Our independent and assisted living occupancy results, which were up 50 basis points from last quarter, were significantly ahead of the industry set.

If you remember back to the third quarter, we reported a 40 basis point sequential increase in independent and assisted living occupancy which also beat industry results. NIC MAP is predicting occupancy to increase in the top 31 metro markets by 60 basis points during 2013.

Our results in independent and assisted living over the last two quarters showed great growth. We expect that with continued improvement in the economy and the housing market, coupled with our focus on sales and marketing to increase referrals, inquiries, tours, deposits, and move-ins, we should be more in line with the industry set during 2013.

As of yesterday, total senior living occupancy was 85.5%. Typically the first quarter presents some seasonality challenges with regards to occupancy and that has been the case so far in the first quarter of 2013. As many of you may be aware, the current flu season has been more severe this year than in years past. Given this, we are not surprised to see our current occupancy numbers temporarily dip.

To help improve our occupancy in the skilled nursing units we will be looking to expand our Five Star rehab-to-home product in several of our CCRCs. We are essentially upgrading older nursing units within select CCRCs into state-of-the-art short-term rehabilitation centers. These units will be private patient rooms with upgraded bathrooms, flatscreen televisions, high-quality in-room dining services, and upgraded private rehab areas.

We have found that these upgrades not only produce positive outcomes for those we service but healthy returns for the Company. The goal is to position Five Star as the provider of choice in our select market areas.

Looking at rates, during the fourth quarter our senior living average monthly rate was up 1.2% from last quarter and up 2.5% from last year, primarily driven by increases in private pay rates. Average monthly rates at our private pay independent and assisted living communities was up 2% year over year and we are expecting to grow rates by 2% to 3% on an annual basis in 2013.

A new initiative that I have focused on with Five Star is brand improvement. Our size and continued growth lends itself to us looking more closely at our brand on both a local and national level. We are one of the largest operators in the country, and because the senior housing market is so fragmented with so few large operators, we think there is a big opportunity to try and impress the Five Star brand throughout the country into each of our local communities.

Local and regional ties are really the ultimate driver of this business, but all the communities can benefit from doing things that work well across our network. Brand equals efficiency, and although Five Star has always been an efficient operator from a cost control perspective, we have significant buying power and leverage as well as knowledge, expertise, and technology that we can bring to all of our communities.

In summary, 2013 looks to be another exciting year for Five Star and I can assure that each and every team member will continue to provide the best possible care and services to our 26,000 residents each and 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 today. I will review our year-over-year quarterly financial results for the fourth quarter and for the year ended 2012.

Senior living revenues for the quarter were $279.2 million, up 1.6%. For the full year senior living revenues were $1.1 billion, an increase of 3%. The increases are primarily due to increased per diem charges to residents and the full-year operation of communities we began to lease during 2011.

Management fee revenues from the 39 senior living communities we manage were $2.2 million for the quarter and $5.8 million for the year. These 39 communities are expected to generate approximately $9 million of annual management fee revenues in our expectation for 2013.

Senior living wages and benefits for the quarter were $135.4 million, down 1.5%, and for the full year were $548.2 million, an increase of 2.2%. Total senior living wages and benefits during the quarter were 48.5% of senior living revenues, which is a 150 basis point reduction from last year as we have been able to make and hold on to improvements in labor expenses and also enjoy reductions in health insurance as well as workers' compensation costs, an area that we have been focusing on.

Other senior living operating expenses for the quarter were $70 million, up 5.2% from last year, and for the full year were $270.1 million, an increase of 4%. As a percentage of senior living revenues, other operating expenses during the quarter were 25.1%, up 90 basis points from last year, due to increased charges from various service providers as well as increases in food, property taxes, and supplies. However, these expenses were partially offset by reductions in utilities and insurances.

Moving on to other income statement items. General and administrative expenses during the quarter were $16.2 million, up 5.6% from last year and represent 4.5% of total GAAP revenues. If you include the revenues from the 39 communities we manage, G&A was actually 4.3% of total revenues. G&A for the year was $61.6 million, an increase of 7.1%, which represents 4.6% of GAAP revenues and 4.4% of total revenues including managed community revenues.

Rent expense for the quarter was $50.6 million, up 1.3% from last year but flat as a percentage of senior living and hospital revenues. For the full year, rent expense was $201.6 million and equal to the prior year as a percentage of revenues.

Income tax expense for the quarter was $807,000 and for the full year was $5.6 million. We have trued-up our year-to-date tax provision which was favorably impacted by (technical difficulty) employment-based tax credits. Interest expense for the quarter was $1.5 million and depreciation and amortization was $6.4 million.

Now I will review our liquidity, cash flow, and selected balance sheet items. Operating cash flows were $13.5 million for the quarter and $56.8 million for the year. During the quarter we invested $17.1 million of capital into our communities and sold $12.3 million of long-term capital improvements.

For the year 2012 we invested $57.4 million of capital into our communities and sold $30.5 million of long-term capital improvements, resulting in a net capital spend of $26.9 million. At December 31, 2012, we had cash and cash equivalents of $24.6 million. EBITDA, excluding nonrecurring items, was $12.1 million, a 39% increase compared to last year and EBITDA for the full year was $46.2 million, up 14% from 2011.

In reviewing our balance sheet, our accounts receivable management remains well-controlled and as of December 31, 2012, the number of days sales outstanding for our consolidated operations was 17.1 days. At quarter-end we had $335.6 million of net property and equipment, which includes 31 properties directly owned by Five Star, 12 of which are unencumbered by debt. We had $24.9 million of convertible senior notes and $46.3 million of mortgage notes payable, which includes $7.5 million included in discontinued operations.

Our two revolving credit facilities are currently undrawn and have a capacity of $185 million. At the end of the quarter our leverage was 19% of book value and 12% of assets. We believe we are in compliance with all material terms of our credit, note, and mortgage agreements.

In closing, 2012 was a successful year of many achievements for Five Star. We overcame the 11% Medicare rate cut that took effect during the fourth quarter of 2011 which adversely impacted our annual results by approximately $17 million. We collateralized 15 of our 31 owned properties and established a $150 million acquisition line of credit which was untapped at year-end.

We divested our pharmacy business in September and created approximately $38 million of liquidity and increased our focus on our private pay, independent, and assisted living business. And, lastly, we took on the management of 16, primarily private pay, independent and assisted living communities during the year.

Our focus remains clear in 2013 we will continue to provide the highest levels of care and resident satisfaction. As we do this will enable Five Star to increase occupancy; increase private pay rates; continue to manage costs and improve margins; acquire private pay, independent, and assisted living communities, either on our own balance sheet or by managing or leasing; and, most importantly, to continue to increase shareholder value.

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

(Operator Instructions) Dan Bernstein, Stifel Nicolaus.

Hello, this is Seth Cohn filling in for Dan.

Seth, good morning.

Good morning. I was just curious about the MPPR changes to your ERF and SNF business, if you could basically speak about any impact you may see in that revenue.

Yes, this is Scott. We are not seeing as big a threat from the MPPR reductions and changes there. It is not a big issue, we don't think, for us currently. We have more concern with the Part B caps really than with the MPPR.

And those Part B caps did impact us in the fourth quarter. Probably to the tune of $200,000-ish, somewhere in that range, so we will offset that with a little bit from our senior living business.

Thank you. Also, I was just wondering, I put back into it the average daily rate for SNFs it went up pretty nicely in the fourth quarter versus the third quarter. I am coming out with about $220 per day.

Is there anything in with the case mix? I would imagine the case mix improved and what you are -- if you see that as a continuing trend of improvement or --? If you could just --

Yes, it's tough to say whether it is going to be a continuing trend. Obviously the case mix was a little better. We probably had more Medicare patients -- we did have more Medicare patients in the fourth quarter compared to the third quarter, and so far into the first quarter that trend has continued so far.

Okay. Just, lastly, I was just wondering if you wanted to put some numbers behind 2013 guidance in terms of acquisition volume; if you guys see acquisitions being a repeat of 2012 or increase on balance sheet.

You know picking guidance for acquisitions is tough. We have got capacity on our own balance sheet to do a fair amount. We have also got our finance partner that we can lease properties from or manage on their behalf, and they can do a fair amount. We have a big appetite. We look at a lot of stuff.

We are seeing some stuff, but the volume probably isn't there right now where it was in 2012. But that can change fairly quickly. Sometimes I think what is going to be a slow year and it turns out we take on 25 communities.

So as of right now I don't expect anything closing for us in the first quarter. I think that is pretty safe to say, but hopefully that is subject to change.

Thank you. That is all for me.

Darren Lehrich, Deutsche Bank.

Good morning. This is Dana Vartabedian in for Darren. Just a few questions here. First, on the base business, I guess particularly with respect to the IL/AL segment, I was wondering if you could give us some more color for sort of how you are thinking about rate and occupancy heading into 2013.

Then I guess aside from flu have you seen anything in your markets, maybe in terms of new capacity growth or anything, that could impact occupancy? Thanks.

Sure, I will start with that. You know in the prepared remarks we did say that the NIC MAP is predicting a 60 basis point increase in IL/AL occupancy. We think that is fairly reasonable. I would like to do a little bit better than that, in all honestly, in terms of what we're shooting for as a goal.

Rates we should target 2% to 3% rate growth on our in-house residents and I don't think that is going to be that hard to achieve on that side either. So that is really the two targets for that front.

And your second question -- oh the flu impact?

New capacity growth.

New capacity growth. We are seeing a little bit. It is still extremely limited. The NIC MAP data for the fourth quarter showed starts were still at a very, very low rate.

Regionally we are hearing some talk about smaller operators starting to rethink about getting into development. There is not a lot of capital out there for development right now, so people have to really kind of put up a lot more equity than they did years ago and that hasn't changed. So I think that is to be a good thing for a little bit in terms of current operators having new development being weighed down by capital needs.

Okay, great. Thanks. Then I guess, given the upcoming potential sequestration cuts, to the extent you have any headwinds from that sort of how are you planning to mitigate or offset some of those risks?

Well, we had some significant headwinds two years ago when they cut Medicare rates by 11% and we offset those. While we are not happy to see more rate decreases coming, I think it is probable that we will see a 2% rate cut in our Medicare business effective on March 1.

Medicare is a small part of our business. A big focus of Five Star when we came out of the gate 10 years ago was to really drive ourselves into that private pay business to where today more than 75% of our senior living revenues come from private pay. So we will see a Medicare cut of 2%, but it is on a small part of our business now.

Years ago it would have been devastating, but today we will more than offset it with our private pay growth. And I expect to offset some of it through acquisitions as well.

Okay, great. Then one more if I could. On the SNF business, I guess can you give us more color for how you are thinking about that on a go-forward basis, I guess particularly with respect to occupancy and length of stay? Thanks.

Sure. You know occupancy Scott talked about in his prepared remarks. It is a focus of ours, driving occupancy in our SNF business. We have been a little down in that area.

Some of that is the fact that we are in more rural markets than a lot of our competition and that is just going to be what it is, in all honesty. But another big part of that is we do need to put some capital into our skilled nursing, and it is predominantly in our continuing care retirement communities.

We think there is some really big upside in that rehab-to-home product that we look to emphasize. We have had some good success in trial areas really in 2012/2011. We got a few of them up and running and we have seen great things.

Our skilled nursing (inaudible) when we do put that rehab-to-home product in fill up, command a waiting list, and do well for us. Do very well. So you will see a lot more of those from us throughout the years coming.

Talking about the portfolio as a whole, it wouldn't surprise me if we selectively continue to get out of some of our standalone skilled nursing facilities that aren't performing well. So when we started Five Star we had 56 communities; we have got 38 still today.

Now those 38 do make good money for us. We got a rent deal when we were kicked out as a public company, so they are cash flow positive. But there are a few that we would take a look at and selectively dispose over the next couple years. It wouldn't surprise me if that portfolio is a little bit less down the road than it is today.

Okay, great. Thank you.

(Operator Instructions) Mike Petusky, Noble Financial.

Good morning, guys. Good end to the year. I guess obviously you guys have been (technical difficulty) occupancy improvement in the IL/AL outpacing the industry here in the last quarter or two, but you are still lagging overall. I mean is it reasonable to think that you guys can close the gap all the way, say, over the next two to three years, or are there are there just some things inherent in your buildings that just make that tough?

I think if you break apart our portfolio and you kind of focus on the IL/AL, the gap there is pretty small, if nonexistent. I think we have outperformed the industry with the vast majority of our properties. We have been bogged down a little bit with skilled nursing and our CCRCs and within the CCRCs really the issue has been skilled nursing. So that is kind of the focus on growing that.

Again, as I mentioned in the last question, some of that is inherent in the portfolio. We are in rural markets that gap, like you said, will be there to some extent, but we do think there is a lot of work that we can do to help close that gap over the next couple of years.

Okay. Then I guess a question around the brand improvement commentary. I mean if there are two or three things that you all could kind of essentially identify in how you're going to do that what would those be?

Well, I think initially we have got a number of communities; for example, we have got a Morningside brand, we have got a Premier brand. A 40-unit building is going to have a much different brand than a 300-unit building in Boca. I know you were at that one recently.

But we are going to start to move towards similar signage. We are going to start to come up with design standards so when we do remodeling, again, we are not giving our operators and our chief engineers' design teams kind of a blank slate. We are going to have them go in with two or three designs for each type of building that they can choose from.

Now it is going to be market driven. Obviously designs in the Southwest is going to be predominantly different than designs in the northeast, but we do want them to have somewhat of a similar look and feel as we start to kind of really create the Five Star brand.

All right, great. Then in terms of the cost, in terms of the upgrade to some of the skilled nursing buildings, I mean can you guys quantify that in terms of the upgrades?

It is tough to say. We probably spent around $1 million for about a 15-bed unit at one of our communities in Arizona, so it is going to be in that range. So you have got to think about that.

Again, I know you know our CapEx structure. That will be funded by the REIT; predominantly we will pay rent on that, but any pick up from that all comes to Five Star. So the payback for us is pretty quick.

All right. Then I guess last question just around your optimism, or lack thereof, of being able to get active on the M&A front. Also, if you would talk about just how you are thinking about these different ways to do M&A -- acquisition, lease, managing, etc.? Can you just talk about possible priorities if you have them there? Thanks.

Sure. I am pretty optimistic. I can just take a look at what we have done over the last several years. Five Star is one of the top largest senior living operators in the country right now and we have done that through acquisition growth, so I continue to see us be busy on the acquisition front.

Just because I said it is a little slow right now doesn't mean I think that is going to be the long-term thinking. People know if they want to sell something they have got a pretty viable buyer here in Five Star and with our capital partner.

In terms of priorities, I would like to acquire more stuff from our own balance sheet. In all honesty, I think that makes us a stronger company and we can do that with smaller deals that are one-offs that generally don't command the cap rates that the larger portfolios do.

But when we do look at a larger portfolio, like I said, we have got that luxury of working with our capital partner and managing it on their behalf. And that is a great deal for us as well. We have driven that management fee business up to $9 million today of revenue. That more than offset -- didn't fully offset, but that Medicare rate cut, a lot of that came through growth predominately driven by our management business.

Okay, great. Thanks, guys.

James Gibson, Punch.

Hi, guys. I noticed that the occupancy of the communities that you own was up pretty significantly since September and up about 3% for the year. What were the driving factors of that?

Again, all those communities that we own are independent assisted living communities and that is really where we have had the biggest amount of success in driving occupancy. Off the cuff, I am trying to think if there is one or two properties there individually that we had good luck with.

A lot of it was stuff that -- some of it was a portfolio we bought in 2008/2009, what we call the Outer Banks portfolio, some old Sun West stuff that we just recently completed some CapEx projects on and we have really had some good success there in the Carolinas. So that has probably been the biggest driver of that is getting those capital projects completed and behind us.

Are the demographics of the properties you own different than the ones that you lease that would kind of affect the different occupancy trends during the year?

No, not really, in all honesty. We own a lot of communities. We are in the Carolinas; we're in Indiana. We have got one in Florida; one or two in Virginia, somewhere in that area. And that is in markets where we lease.

Predominantly very similar. If you look at kind of our characteristics of the owned and leased portfolio in total, we averaged about 110 units per community. And if you look right at our own stuff we have got 31, maybe a little bit less. You are talking about 95 units a community so it is very similar stuff. And the age is similar as well.

Do you break out what the EBITDA contribution was in 2012 from the communities you own?

No, we don't provide that information, but obviously I think if you were to take a look at the blended averages of our independent and assisted living, which are comprised of owned and leased, you could almost use those same ratios against the owned, although the owned are slightly lower in average monthly rate. But, again, those percentages would pretty much hold true to the owned.

Okay, thank you.

Speakers, I will turn it back over to you for closing comments.

Great, well, thank you all for joining us today. We look forward to updating you on our first-quarter results and the results in the spring. Thank you. Bye.

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