Alerislife Inc (ALR) 2013 Q1 法說會逐字稿

Good day and welcome to the Five Star Quality Care first-quarter 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 and good morning, everyone. Joining me on today's call are Bruce Mackey, President and CEO; Paul Hoagland, Treasurer and CFO; and Scott Herzig, Chief Operating Officer. The agenda for today's conference -- a presentation by management followed by a question-and-answer session. I would also note that the transcription, recording, and retransmission of today's conference call is strictly prohibited without the prior written consent of Five Star.

Before we begin I would like 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, April 29, 2013. 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 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 first-quarter earnings call. For the first quarter of 2013, Five Star reported income from continuing operations of $0.05 per share. Results for the quarter included an income tax benefit of $1.5 million or $0.03 per share.

Excluding nonrecurring items, income from continuing operations was $0.02 per share. This compares to $0.03 per share for the same period last year. EBITDA, excluding nonrecurring items, was $9 million, flat with last year's first quarter.

I would also like to note that our health insurance expenses during the first quarter were $1.8 million higher this quarter compared to last year, due to an increase in the number of high-cost claims. Paul will go into further detail on this later in the call.

On past earnings calls we have talked about what the key areas of success are for our business -- to increase occupancy and rate, while holding labor, operating expenses, and general and administrative costs in check. This quarter we were successful in two of these areas.

We controlled our labor and general and administrative costs and most of our operating expenses, health insurance expense aside. However, total senior living occupancy was down 50 basis points from last year. While we expected and alluded to a seasonal drop in occupancy on our fourth-quarter earnings call, we were disappointed with the year-over-year decline.

Our healthcare costs should moderate going into next quarter, and the negative impact from a severe flu season has abated. But we appreciate that we need to do a better job growing occupancy. Increasing occupancy will be the biggest driver of EBITDA growth going forward.

Before I go to the highlights of the first quarter I want to walk you through some of the significant changes we have made at Five Star. These are changes we began to implement in 2012 that equip us with the right people and the right tools crucial in our pursuit to grow occupancy.

The most important component of success is having the right people in place. Two new members of our senior leadership team were put into place in the latter half of 2012 and at the beginning of 2013, and both are critical to our success.

First, Scott Herzig was named Chief Operating Officer during the third quarter of 2012, and we are pleased with what he has done so far. A big focus of Scott is increasing the Company's occupancy, and we are confident in his ability to lead our sales and marketing efforts. At his direction we have already put into place new tools and processes which I believe will have a significant impact on our overall sales culture.

Second, we recently hired a new Vice President of Sales and Marketing. While recruiting for this position at the end of 2012, we were focused on candidates who were from outside the senior living industry, and who would bring new ideas to the table and rethink our whole approach to sales and marketing. Starting in January of this year, Rob Poyas became our new Vice President of Sales and Marketing.

Rob brings 18 years of experience in the hospitality and hotel industry where he served in various sales and revenue management positions at Starwood Hotels. He was the former vice president of sales administration, where he oversaw the sales operations of 170 hotels with nine different brands across North America. We are thrilled to have Rob on board and are confident that the fresh perspective he is bringing to the position will increase our ability to drive occupancy growth over time.

We have already made important progress on a few key occupancy growth initiatives. First, our customer relationship management system, Salesforce, which was fully rolled out during the third quarter of 2012, has created new benchmarks and standards for our sales and marketing staff. We now have comprehensive metrics on sales performance versus goals, lead tracking, and follow-up.

We are able to be more responsive to our leads, and regional personnel have the ability to track how quickly their communities are following up on leads. Management now has the ability to see how leads are being managed. Salesforce is creating total transparency of our sales process.

Building upon the success of Salesforce, we have made some additional enhancements. We automated our backend systems for processing leads from our website and third-party sources. This means that our sales staff spend more time working on leads as opposed to data entry.

Second, we recently expanded our regional marketing and sales support by 20% and also made some staffing changes at the regional sales level. We are currently trying to fill the remaining open positions within our expanded sales team, and will look to them to execute on sales and marketing initiatives to drive occupancy.

Third, we recently made several enhancements to our website which will improve our lead-tracking capabilities and search engine optimization. Over the last 45 days, leads coming from our website are up 25%.

Fourth, we recently partnered with a new national referral agency, which we believe will start to gain traction during the second quarter and will be a clear benefit over the long run.

And last, but probably most important, we are beginning to redesign our sales team's compensation plans. These plans provide higher compensation for increased occupancy results and will move us towards a pay-for-performance sales culture.

We are keenly focused on improving occupancy and believe that these initiatives will lead to meaningful occupancy improvement as we move through 2013. We continue to be encouraged by the positive outlook for the industry as a whole.

Let's now look at the detailed results of our senior living business, which includes independent and assisted living communities, continuing care retirement communities, or CCRCs, and skilled nursing facilities. In the first quarter we reported $278 million of revenue, up 1% from last year, and $70 million in EBITDA, down 1.2% from last year. The decrease in EBITDA is primarily driven by the year-over-year decline in occupancy and the temporary increase in healthcare costs that I mentioned previously.

On a positive note, at our core independent and assisted living communities, EBITDA increased by 3% and margins were up 60 basis points from last year.

Moving on to our managed communities, we received $2.3 million of management fee revenue for the quarter, up significantly from the first quarter of last year, mainly due to growth from managed acquisitions. We currently manage 39 communities with 6,700 units.

Occupancy for the quarter was 87.1%. On a same-store basis, revenues are up 3.6%, and EBITDA is up 3.2% from last year.

Moving on to the acquisition front, during the first quarter we entered into an agreement to manage an assisted living community with 93 units located in Georgia. We continue to look for opportunities to grow the Company.

We have the ability to lease or manage properties and also have the capacity to purchase communities when it makes sense. Our focus is on newer, well-run communities that are located in an area where we have a geographic concentration of operations.

Over the last year or so, pricing has gotten expensive. Cap rates have compressed, and newer product is becoming more difficult to find.

We will continue to seek acquisition opportunities, but given the cap rate compression throughout the market we are spending more time on ways to develop and expand our existing portfolio. We have been successful with this approach in the past, adding units to communities where occupancy is in the 90%-plus range and taking advantage of the efficiencies of having services and staff already in place. We will have more details on these opportunities later in the year.

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 during the quarter. Scott?

Thank you, Bruce. Senior living occupancy for the first quarter was 85.4%, down 50 basis points from last year. Occupancy at our independent and assisted living communities was at 88.0%, up 40 basis points from last year. CCRC occupancy was down 90 basis points from last year to 83.9%, and skilled nursing occupancy was down 260 basis points from last year to 79.0%. As of Friday, total senior living occupancy was 85.1%.

On the skilled nursing side our CCRC occupancy results continue to be affected by unfilled semiprivate rooms. As I discussed last quarter, we are focused on renovating and converting current semiprivate units in our CCRCs to Five Star branded Rehab to Home units which will be filled by more profitable, short-term Medicare patients. These renovations include upgrading units to private rooms with updated bathrooms and private showers, flatscreen televisions, high-quality in-room dining services, and refurbished private rehab areas. We currently have three significant CCRC conversion projects going on right now in South Carolina, Wisconsin, and Kentucky, and have three more projects slated to commence later this year.

Looking now at our standalone skilled nursing facilities, total occupancy here continues to decline. We continue to see that the skilled nursing industry is experiencing some changes and other alternatives for nursing care are becoming more available, which place the skilled nursing facilities in direct competition with places like assisted living facilities, home health, and other community-based facilities, the likes of which we haven't seen in the past.

To combat this, over the last two years we have spent capital at certain facilities to keep them competitive in their respective markets. In addition, last year Five Star realigned its regional corporate structure to create a division solely focused on skilled nursing. This lowered some of our corporate overhead expenses as well as created more focus and visibility on this business.

In the end, a significant portion of our skilled nursing facilities are located in rural areas with declining populations, and this trend is a major factor in the overall decline in this business for Five Star. Over the last few months we've started to see the emergence of new accountable care organizations, or ACOs, in a few of our markets. As this program continues to grow we will look for ways to partner with these groups, as there is an opportunity for quality operator such as Five Star, with proven track records of positive patient outcomes, to improve our skilled census.

Looking now at rates, this is one area where we were successful during the first quarter. Senior living average monthly rates were up to 2.5% from last year. Average monthly rates at our private pay independent and assisted living communities were up 2.1% from last year, and we still expect to grow rates by 2% to 3% on an annual basis in 2013.

Rates at our CCRCs were up 2.2% compared to last year, and skilled nursing rates were up 5.8% compared to the same period last year. Starting October 1, 2012, Medicare increased rates to skilled nursing providers by 1.8%; but the sequestration which started April 1, 2013, cut rates by 2%, so essentially we expect Medicare rates to be flat in 2013.

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

Thank you, Scott, and good morning, everyone. Thank you for joining us. I'll review our year-over-year quarterly financial results for the first quarter of 2013.

Senior living revenues for the first quarter were $278.2 million, up 1% from last year. This primarily was the result of increases in our per-diem charges to residents. Management fee revenues from the 39 senior living communities we manage were $2.3 million for the quarter, and these 39 communities are expected to generate $9 million of management fee revenue during 2013.

Senior living wages and benefits for the quarter were $139.2 million and represented 50.0% of senior living revenues, a decrease of 20 basis points from last year. However, we did see an increase in employee health insurance costs of $1.8 million or 60 basis points as a result of a number of large-dollar claims during the quarter. We would expect this expense to moderate going into the second quarter.

Also, as you know the Affordable Care Act will affect all companies of our size as 2013 and 2014 begins. We are working closely with our advisors to be as efficient as the law will allow in the implementation of this major change in the healthcare system.

Other senior living operating expenses for the quarter were $69 million, up 3.5% from last year, but down sequentially by 1.5% from last quarter. As a percentage of senior living revenues, other operating expenses during the quarter were 24.8%, up 70 basis points from last year but down 30 basis points from the fourth quarter of 2012.

The year-over-year increase in operating expenses is due to the outsourcing of housekeeping and laundry services, which cost about $700,000 and was offset by lower wage costs. We also experienced increased costs associated with snow removal and winter conditions, as the first quarter of 2013 was harsher than the previous year. Lastly, utilities seasonality, which increased costs by 60 basis points from the fourth quarter into the first quarter.

Moving on to other income statement items, our two inpatient rehab hospitals which account for 8% of total revenues generated $2.6 million of EBITDA during the quarter. These results are virtually even to last year. Although revenues increased 2.6%, as occupancy increased to 63.7%, it was offset by seasonably higher utilities and snow removal costs.

General and administrative expenses during the quarter were $15.1 million, down 2.1% from last year, and represent 4.2% of total GAAP revenues. If you include the total revenues from the 39 communities we manage, G&A was approximately 4% of revenues. Rent expense for the quarter was $50.9 million, which remained unchanged at 16.6% as a percentage of total senior living and hospital revenues.

Interest expense for the quarter was $1.5 million, and depreciation and amortization was $6.5 million. Our results for the quarter included a $1.5 million income tax benefit related to the work opportunity tax credit program, which expired in 2012 and was retroactively reinstated on January 3, 2013. For 2013, our annual effective income tax rate is estimated to be 31%.

Now I will review our liquidity, cash flow, and selected balance sheet items. Operating cash flows were $2 million for the quarter. During the quarter we invested $12.6 million of capital into our communities and sold $8.2 million of long-term capital improvements. At March 31, 2013, we had cash and cash equivalents of $15.2 million.

EBITDA, excluding nonrecurring items for the quarter, was $9 million, flat with last year despite the seasonal decline in occupancy and an increase in our health benefit expense. In reviewing our balance sheet, our accounts receivable management remains well controlled. As of March 31, 2013, the number of days sale outstanding for the consolidated operations was 17.5 days.

At the end of the quarter we had $333.8 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 million of mortgage notes payable, which includes $7.5 million within our discontinued operations.

Our two revolving credit facilities are currently undrawn and have a total 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.

At this point I want to turn the call back to Bruce for a few closing remarks.

Great. Thanks, Paul. In summary, while earnings this quarter were lower than expected, we were able to execute in a few areas. Average monthly rate was up 2.5% across our senior living portfolio. G&A represented 4.2% of total revenues, the lowest in the industry, and EBITDA was essentially flat with last year in spite of lower occupancy and significantly higher health-insurance expenses.

I believe that the work we have done thus far and the people we have put into place are executing on our plan to grow our companywide occupancy. Our focus remains clear -- grow occupancy, increase rates, and keep operating expenses and G&A in check. When we deliver on all these items, I am confident that the true value of this Company will be realized.

With that, Paul, Scott, and I would like to open it up for questions. Thank you.

(Operator Instructions) Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. I just wanted to first start in the occupancy topic, and I just wanted to clarify what I heard. I think, Scott, you said occupancy stood at 85.1% on Friday. Is that -- can you just talk a little bit more about what you are seeing so far into Q2, and why you think occupancy continued to back up a little bit?

Well, we're starting to see some movement, a little bit of movement op in this quarter so far. Our leads are up; our discharges are down. We are starting to see some things move in the right direction. A lot of things come into play, and we think we will be all right this quarter.

Yes, just to buttress that, we really -- and I did allude to it on the fourth quarter call -- got hit with the flu real significantly in the first quarter. We (inaudible) [trimmed] that. Most of the flu was really gone, the effect of it, late February, early March; we still had a few communities that were impacted.

But as of right now, that is really, for the most part, done with, and they are all admitting. Just to put a finer point on it, we actually had 30 communities that for various times, up to a week or so, could not take any residents in during the first quarter because of the flu. Residents were being discharged, or passing away, or moving on to a lot higher level of care. And at the same time as you had the discharges up but we weren't admitting to those communities during that time, on a positive note, our admissions were relatively flat quarter over quarter. But it really was the discharges that really got us hit pretty hard in the first quarter.

And, like Scott said, that is definitely abating as we head into the second quarter. And we did see good occupancy growth at most of our IL/AL communities last year during the second and third quarters, so we expect that to repeat this year.

Okay. So you're expecting sequential occupancy improvement, I guess, just starting off on a little bit of a lower base at this point in the quarter. Is that (multiple speakers)?

That's correct, yes.

Okay, and then you mentioned -- just in terms of the referral agency relationship, that you have made a change in. Can you just talk a little bit more about that, and how we should be thinking about the impact of that for you, and how long that has been in place?

It hasn't been in place that long. It started in the month of January.

What we did is we in engaged with a national referral company, caring.com, you can go to our website and take a look. And they are working with us.

It was a tough transition for the first several months as referrals started flowing through caring.com and on to us; we did notice a drop-off in our results. It has quickly picked up. It has gotten a lot better, I can tell you.

I know some of the other large senior operating companies, caring.com really engaged with a number of people, not just Five Star to start the year, and their referrals are getting better. We are getting more leads from them. Every month has got a little bit better, but it was a tough transition to start, but like I said it is getting better.

I don't know if, Scott --?

Well, our speed at which we are responding to leads is a lot better now, as Bruce mentioned in his earlier comments with the salesforce. And it's just we're getting better qualified leads from them now at this point. But, as Bruce said, it was a tough go for the first couple months.

Okay. Then just to help me put that into perspective, what portion of your referrals are coming from outside agencies like that? And where do you think that might be able to move to?

It's a significant portion. Right now our larger referral agencies -- you're in the 30%, 40% range between that referral agency and others that I just mentioned. One of the biggest lead referral sources continues to be our website, which is getting better and I alluded to that on my prepared remarks, in terms of the quality of our leads coming in from the website. Search engine optimization is really driving the number of leads.

Referrals is still our biggest place that we do get leads from, which is a great thing, when our own -- when family members of existing residents refer over -- obviously, it is great word-of-mouth. Those referrals we don't pay for anything, for the most part, they're usually -- there might be some small incentive for the resident or family member; but it is nothing from what a third-party agency does charge us.

Okay. That's helpful. I'll jump back in the queue.

Okay. Thanks, Darren.

Daniel Bernstein, Stifel.

Good morning. I actually want to go back to your comment about you're seeing cap rate compression maybe turning a little bit more to internal investment. Does that imply that you don't have -- you don't see a big pipeline of acquisitions for the remainder of the year? Or how should I think about that comment in terms of the cap rate compression?

Yes, well, I said in my prepared remarks, we have got one community that we have got under agreement right now to manage in the state of Georgia. It is late April, so that means we will have done -- we've done nothing so far; so it is going to be a slow year for us.

It is a full four [years] so far. We are working very diligently to find acquisitions and are hopeful that it will turn around in terms of us getting something.

And that happens. I think 2009 started off to be somewhat of a slow year, and that was the year -- I'm sorry, 2011, when we did Bell and then Vi later on that year. But it was starting to slow.

Could that happen again? Sure. We have got the capacity. We've got the relationship with senior housing, so they have got the firepower to get that done. And we are hopeful and looking.

But as of right now, we don't see that, and it is not anything that we are having under, obviously, agreement.

Is it the volume of deals that might be coming your way, or is it again the pricing is kind of turning you off?

It is a little bit of both, in all honesty. There -- we were fairly busy at the NIC meeting a few weeks ago, looking at certain things. People would come to us with deals that they know were going to be sub 6 cap rates, and we just can't do it a sub 6 cap rate.

So we saw a few with that, but we still look at deals every week. We probably get three or four deals in, and we tour a couple a week -- a couple might be a little bit aggressive, but at least one or two a week in that regard.

And like I said, the one in Georgia came along. We have got at least sites, report that we are waiting for (inaudible) right now on a few others. So we are hopeful.

But getting back to what I said, we are starting to spend a little bit more time looking at our existing portfolio. We have a vast number of communities out there that we have got excess land on. That is an in excess of 40 of our communities, and a number of those communities are doing very well in terms of occupancy.

If you look at all our portfolio, 226 properties that we -- approximately -- own or lease, a vast number of those are 90%, 95% occupied and have the room to grow and the market to grow. And we will start looking at adding to those communities.

We have got a few that are in the early stages right now. We wrapped up two or three a year ago, and we will definitely dedicate more resources to that project going forward.

Okay. In terms of the occupancy in the quarter, particularly in the private pay senior housing side, I may have missed a little bit of the beginning of the earnings call, so hopefully I'm not asking you something that you already talked about, but could you talk a little bit about the sequence of occupancy through the quarter and January, February, March?

It sounded like January and February were really tough quarters with the flu and then maybe it has rebounded some. But if you could just give us a sense of how the quarter went in terms of occupancy timing.

Yes, sure. It really started off early in the quarter; early January we really started to see the impact of the flu season. So we were shutting down admissions and discharges were going up early January.

Continued into February, but definitely by the middle to end of February, it was slowing down a little bit. Really stabilized in March. I think again stabilized in April.

But at the same point in time, we notice our leads are up really the last month; we've had a good month of leads. And I know that is a forward indicator of potential occupancy growth in the future.

Do you have the quarter-ending private pay occupancy?

No. We've got the quarter ADC, but not (multiple speakers) at the end of the quarter.

Okay, okay. I will hop off. Thank you.

(Operator Instructions) Mike Petusky, Noble Financial.

Good morning. Hey, Bruce, I think you characterized sales team comp change as the most important of those items you listed. Can you specifically say what it was and what it is now? What changes have been made?

Well, we are in the process. That was the one thing that I said during my prepared remarks, that we hadn't fully implemented as of yet. That we are really starting to redesign phase of it; and that definitely is something that Rob brought to the table from his experiences in other industries, organizations.

But if you look at our sales staff, I'm going to ballpark the numbers, but it is probably an 85/15 split in terms of salary versus variable comp. And those numbers I expect to shift around.

We will experiment with different things. But will it go 15/85? I don't know. It is possible.

But we really want to drive a sales or pay-for-performance culture, as I said in my prepared remarks, and he has really started on that really right now.

It's potential that that will be in place by the end of the second quarter. I know it is a goal of his. It was a goal of his coming right in the front door, is where he wanted to be.

He has tackled some of the bigger things to start, a lot of things that I mentioned on the call. I think a big thing of his as well is also making sure that he has the right regionals in place; and I did say we have increased the capacity in his group, and also we had a lot of churn in that group as well. And it is really -- getting the right people into place is going to be a big thing. But this is also one of his biggest things is making sure that we have got that right pay scheme in place for our sales people.

Okay. I guess -- I know you guys don't really give real specific guidance going forward. But just generally, would you be able to sign on to the idea that you would expect the first quarter to be the low-water mark in terms of really EBITDA occupancy and for most of the key metrics we have talked about today?

Yes, Mike, good question. If you look back at 2012, what you just asked is the reality of what we experienced in 2012 Q1. For instance, as we do finish Q1 and we are moving into Q2, obviously we can't represent that health benefits will definitively decline; but we look at health benefits in Q1 of 2013, they were 3.9% of revenue. Last year Q1, they were 3.3% of revenue; and for the full year last year, they were 3.3%. Last year in the second quarter, health benefits were 3.5%, so they are -- if it follows that same trending, it is 40 basis points.

Utilities really kind of the same talk. In the fourth quarter utilities were 3.5%; first quarter, 3.1% -- I'm sorry, 4.1%. And last year they were 4.1%. Last year's second quarter was 3.5%. So again a 60 basis point drop there.

And then we also have the payroll taxes associated with matching taxes, which in the first quarter this year they were 4.2% of revenues, same as last year. But second quarter, they dropped down by 60 basis points to 3.4%.

So you take a look at those favorable trajectories, yes, we expect Q2 will improve.

Add on that a little bit of occupancy growth that we hopefully talked about, and then that would be the last thing -- and, Paul, you did mention it in your prepared remarks -- is the snow removal. That was probably several basis points as well that we saw in the first quarter that we don't expect in the second quarter.

Okay. All right. Thanks, guys.

Thank you. At this point we have no further questions, so at this time I would like to turn it back over to Bruce Mackey for closing remarks. Please go ahead.

All right, great. Thank you. And thank you all for joining us today. We look forward to updating you on our second-quarter results later this summer. We are planning on participating in several upcoming investor conferences -- the Bank of America Merrill Lynch conference in Las Vegas; the UBS Healthcare Conference in New York City; and the Deutsche Bank Healthcare Conference in Boston, all of which are in May. We will also be participating in the Jefferies Global Healthcare Conference in New York City in early June.

We hope to meet many of you there. Until then, thanks again for your participation today.

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