Alerislife Inc (ALR) 2013 Q2 法說會逐字稿

Good day, and welcome to the Five Star Quality Care second-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 afternoon, everyone.

Joining 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 is a presentation by management followed by a question-and-answer session. I would also note the recording, transcription and retransmission of today's conference call is strictly prohibited without the prior written consent of Five Star.

Before we begin, I'd 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 lease on expectations as of today, July 29, 2013. 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 or SEC regarding this reporting period. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause those difference is contained in our filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements.

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 second-quarter earnings call.

The second-quarter results showed signs of improvement over the first quarter of this year with EBITDA up 24%. We continue to make progress on several marketing initiatives and are encouraged by the start of a positive trend in occupancy we saw during the month of June that has continued into July. In the press release we issued late this afternoon, we also announced that we are marketing for sale 11 non-core communities, the majority of which are free standing skilled nursing facilities whose results are now included in discontinued operations.

I want to give a quick high level overview of our results for the second quarter before going into detail on some of our initiatives and acquisition and disposition activity. Net income from continuing operations was $0.06 per share compared to $0.04 per share in the first quarter. EBITDA was $12.5 million, up 24% from the first quarter of this year. Ceiling revenues were $269 million, and total senior living labor and operating expenses were $196 million. We saw a nice improvement in total labor and operating expenses, which were down 1.4% from the first quarter with savings and labor and benefits driving most of that decline. Senior living EBITDARM was $73 million, a 3.5% improvement over the first quarter. Senior living occupancy for the first quarter was 85.5%, and total private pay independent and excluding occupancy was 87.9%. Overall rates were soft this quarter, as a result included a 2% Medicare sequestration rate cut which began on April 1. Private pay rates were up 1.7% from the second quarter of last year.

Moving on to our managed communities, we received $2.3 million of management fee revenue for the quarter which continues to be up on a year-over-year basis through the managed communities we acquired since last year. Managed occupancy for the quarter was 87.4%. On a same-store basis compared to the second quarter of last year, managed occupancy was up 340 basis points, revenue grew 4.8%, and EBITDARM was up an impressive 10.2%.

As I mentioned, we were active on the disposition front this quarter. Upon review of the portfolio by our board, the decision was made to move 11 communities with 721 units into discontinued operations to be marketed for sale. Eight of the communities are skilled nursing facilities and the other three are assistive living communities. 10 of the communities are leased and one of the assisted living communities is on our balance sheet. These communities either did not fit the criteria of what we consider to be a core asset or in a geographic location that made management difficult. Selling these communities will allow us to put more focus on our core business, which is operating private-pay senior living communities in areas where we have a geographic concentration.

In addition, at the end of April, we completed the sale of two skilled nursing facilities that have been held in discontinued operations for some time. The percentage of revenues we received from residents' private resources is at an all time Company high of 76.7%. This figure doesn't take into account our managed communities, which are also predominantly private pay. We have made great strides in increasing our private pay revenues over the past several years and will continue to do so going forward.

On the acquisition front, we started to see more activity during the second quarter. We currently have four senior living communities under agreement to manage which we expect will close during the third and fourth quarters. These communities have a total of approximately 300 units and are located in Georgia and Tennessee. All of these communities are well run private pay communities in areas we have a geographic concentration.

We also continued to source deals on a regular basis and are working diligently to add to our existing pipeline. We continue to evaluate opportunities within our existing portfolio for expansions and are on track to have a few projects started by the end of 2013. I expect to have more details to share with you on our progress throughout the year.

We are also making progress on our rehab to home program. For those of you not familiar with rehab to home, it is a Five Star program that combines state of the art nursing facilities and a high level of services located within our continuing care retirement communities. We are upgrading a number of the skilled nursing units within our CCRCs where we feel this program would be a success.

Just within the last few weeks, we opened a new rehab to home unit in our Myrtle Beach, South Carolina CCRC. Pictures of the unit are available on our website. The unit looks spectacular, and the grand opening was well attended. We have two other projects underway that should be completed by the end of this year and we are evaluating future possible locations as well.

At this point, I'll turn the call over to Scott Herzig to provide more detail on our operating results.

Thank you, Bruce.

Senior living occupancy for the second quarter was 85.5%, down 50 basis points from last year. Private pay independent and assistive living occupancy was 87.9%, up 20 basis points from last year. As I alluded to last quarter, our occupancy numbers at lowest point in March and in April following a tough flu season and a slow first quarter for move-ins. However, we saw an inflection point in this trend during the latter part of May. Coming off the end of the second quarter and into July we have seen continued improvement in our overall occupancy numbers. As of Friday, total senior living occupancy was 86.2%, a 70 basis-point improvement above second-quarter average.

Senior living average monthly rates were up 80 basis points from last year. The 2% Medicare sequestration rate cut impacted our results this quarter, so overall rate growth was minimal. Rates at our private pay independent and assisted living communities were up 1.7% from last year. This is comparable to what the NIC industry data showed for senior housing rate growth during the second quarter.

During the second quarter we saw an overall increase in both leads and total move-ins. Total leads were up from last year and from last quarter. Total move-ins were up 6.5% compared to last quarter and up 4% year-over-year. The referral source with the highest lead volume increase during the second quarter was our website where we saw average web leads up 38% compared to the first quarter.

During the second quarter, we also made good progress in our sales and marketing initiatives. To date, 90% of our regional sales positions have been filled, and we are close to filling the one remaining open regional position. In total, we have added three additional regional sales managers across the country so that they can be better aligned with our regional operations directors and so they can help drive our sales initiatives at the local level.

Also during the second quarter, we began piloting a new results-based commission program to select sales teams throughout the Company. Compared to our current compensation plan, our new sales commission plan has a higher level of accountability for sales counselors, but also includes a 40% incentive component which is much higher than the incentive portion of our current sales compensation plan.

And finally, starting in August, we will begin rolling out our completely revamped sales training program. This program will involve training all of our sellers at the community level on Five Star sales processes, standards and external business development strategies. The last couple of months have shown small but steady growth in our occupancy numbers, and we're anxious to continue to build upon our strength and sales platform.

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

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

Senior living revenues for the quarter were $269 million, unchanged from last year. Management fee revenue from the 39 senior living communities we managed was $2.3 million for the quarter and is on track with our expectations of exceeding $9 million during 2013. Senior living wages and benefits for the quarter were $130 million and represented 48.5% of senior living revenues, an increase of 10 basis points from last year, but a 140 basis point decrease from last quarter. The primary causes were the reduction in employee health care and the decrease in matching payroll taxes.

Other senior living operating expenses for the quarter were $66 million and represented 24.4% of senior living revenues, an increase of 70 basis points from last year. The year-over-year increase in other operating expenses is due to increased costs associated with outsourcing certain cleaning services which were offset by labor reductions and increases in operating supplies, provider fees and marketing costs. Compared to last quarter, operating expenses declined 40 basis points, primarily due to the normal seasonal decline in our utility costs. Our two inpatient rehabilitation hospitals which account for 8% of total revenues generated $3.6 million of EBITDA during the quarter, an increase of $1.1 million from last year. Occupancy was 61.9% for the quarter, an increase of 210 basis points from last year and was a key driver to our performance improvement.

General and administrative expenses during the quarter were $15.4 million, representing 4.4% of GAAP revenues and were down 40 basis points from last year. If you included the revenues from the 39 communities we manage, G&A is 4.1% of revenues on a year-to-date basis. Rent expense for the quarter was $50.9 million representing 17.1% of senior living and hospital revenues. Interest expense for the quarter was $1.4 million and depreciation and amortization was $6.7 million which combined, were unchanged from last year.

Now, I'll review our liquidity, cash flow and selected balance sheet items. Operating cash flow was $6.6 million for the quarter. During the quarter, we invested $13.7 million of capital into our communities and sold $7.7 million of long-term capital improvements. At quarter end we had cash and cash equivalents of $19.3 million. EBITDA excluding non-recurring items for the quarter was $12.5 million, down 9% from last year, but up 24% from last quarter.

In reviewing our balance sheet, our accounts receivable was 17.7 days sales outstanding for the consolidated operations. During July, we redeemed the entire outstanding balance of $24.9 million of our convertible senior notes outstanding. We refunded the redemption with cash on hand and $20 million from our line of credit. As of today, the balance on our line of credit has been reduced to only $10 million outstanding. At quarter end, we had $331 million of net property and equipment which includes 30 properties directly owned by Five Star, the total of which are encumbered by debt. We had $37 million of mortgage notes payable, our debt to total book capital was only 17%. Following the redemption of our convertible senior notes in July, debt to book capital is now only 10%. Our two revolving credit facilities have a total capacity available of $175 million today.

In closing, we are encouraged with the recent positive trend in occupancy within our core line of business as evidenced by the increase in occupancy today over the end of the second quarter. With our continued focus on improving our sales and marketing programs and culture, we expect to see continued improvement over the next several quarters. In addition, our divestiture of several non-core rurally located properties brings our focus and attention even more so onto the core private pay portfolio. The additional managed communities we expect to begin to manage later this year will also increase our management fee revenues to which there is a significant positive flow-through.

Thank you. We'd now like to open it up to questions from the audience.

(Operator Instructions)

The first question is coming from the line of Darren Lehrich with Deutsche Bank, please go ahead, sir.

Okay. Thanks. Good afternoon, everybody.

Hi, Darren.

Hi, there. Couple of things. First, Bruce, you mentioned there is four communities that you will be assimilating in the second half, and I guess could you just expand a little bit more the nature of those transactions? You will be managing the facilities is what I heard, and will any of them be brought on balance sheet, maybe a little bit more on what you are bringing on-line there.

Sure, we've got four well run, higher-end private pay communities that will be managing on behalf of senior housing properties trust during the third and fourth quarter. From a positive point, the portfolio was fairly non-existent in our last quarter call, and so we built a little bit of that up and we continue to source additional deals. So, somewhat optimistic by the increased level of activity. Nothing on our balance sheet right now, but we're still continuing to look and hopeful that we can get something at some point.

Okay. That's helpful. And as far as the sales go, you obviously are taking a number of properties here in (technical difficulty). I guess a couple of things I wanted to ask in terms of the sale process, who's driving that process? I guess it is -- is it safe to say it is S & H, or how much involvement will you have in the whole sale process? And to the extent that you're not successful in selling them, at what point will you bring them back into continuing ops?

Okay. Two questions. Really, it is not a start -up process, I can tell you that. I can tell you that Five Star is predominantly driving the process. We have a mechanism at least to sell properties that we feel make sense, and we get a reduction in the rent based on net proceeds that we deliver to S & H. It is really an opportunity per view to make sure that to do a good job doing that and provide that over to senior housing. It is early in the process, as I said.

I think we're optimistic that some will go fairly quickly; some might take a little bit longer, but we are -- we believe that we will sell all of them. I can't give an update as to timing. It is possible some will happen this year, but it's likely where we are, end of July, the majority will probably take place next year, early next year.

Okay. And then I guess we caught some comments from Kevin -- I'm sorry, from David Hegerty, maybe about a month or two ago, he mentioned that there were 48 properties. I'm just wondering how this number fits into that and whether there might be more that had been contemplated.

No, we're not contemplating any more at this point in time. We're going to see how this sale goes. And it's possible at a future we'll reevaluate them, but for right now it's -- we're selling these 11.

Okay. All right. And then the last question I had, maybe for Scott, the seasonal factors on occupancy, you guys were pretty clear about that and we're now seeing some improvement. Maybe just some commentary from you, a post-mortem on the first half, just what you've identified as maybe some of the key challenges beyond just some of the seasonal factors that we've already heard about.

Well, like you mentioned, we had a difficult time with the flu season. Looked like we bottomed out at the end of the first quarter and into April. But we've seen some nice movement up in the last couple of months with some of our sales and marketing activity really starting to come to fruition.

I think to add to that, some of the things that we've done and just -- Scott is relatively new. He has only been here for a few quarters, so we'll get his team into place and then build that team up. I think it's a really big thing, and the team is coming along nicely. And we're seeing more and more things that I like on it to each and every day in that marketing program, so it is really building upon that. We knew this wasn't a one quarter turnaround in our sales and marketing effort. It is going to take a few quarters. We're pleased with the progress we're making so far. We know we have got a lot of progress to continue on down the road. But really, from where we stand right now, it is moving in the right direction.

Yes, okay. Well, definitely looks like you've made a lot of progress. Thanks.

Appreciate that.

Okay.

(Operator Instructions)

The next question is coming from the line of Dan Bernstein with Stifle, please go ahead, sir.

Good afternoon.

Good afternoon, Dan.

Hi. I guess I'm trying to understand little bit more on the occupancy pattern and the private pay senior housing side. Are you able to disclose where you ended the first quarter versus where you ended the second quarter? I'm trying to understand how much occupancy actually ramped up in the second quarter.

We haven't disclosed that, but there are a few data points that I think we have disclosed that should help you get there. When we did our first quarter earnings call, we stated we were at 85.1% on that first quarter earnings call. Now, we did move a number of properties into discontinuing operations that probably account for 40, 50 basis points, somewhere in that range of occupancy. But around 85.5%, at that point in time. I don't know the exact date, end of April, to date, like Scott said in his prepared remarks were 86.2%, comparable to where we are today. We are up 60, 70 basis points between, really, that that point in time and today.

Does that include --

And the same thing, if you look at where we were for the entire second quarter average, again, we were 85.5%, today we're up 86.2%. We're up 70 basis points on both those data points and bullish about where we're going to continue to go from here.

I guess what I was trying to figure out is, if you look at the NIC map industry data, independent living actually declined in occupancy on the average from 1Q to 2Q. And was just trying to -- if that was an average issue or if there was something else still impacting the second quarter, like the flu. But it seems like it is a little bit more of an average issue where you actually -- where the industry may have ramped up through the second quarter, but the averages still show the decline. Does that make sense, or?

I'm trying to think how you correlate that, the NIC --

The NIC data actually showed a decline in occupancy --

We show that softness as well, but I can tell you from where we stand today, it's definitely gotten a lot better, and most of the leading indicators point to continued improvement.

Okay. And on rate growth, you had year-over-year rate growth of about 1.7%. Is it safe to say that your portfolio really doesn't have a lot of pricing power? And again, in line with NIC map data, that you're really tracking more of the US inflation rather than being able to push rate above that inflation point at this particular time.

Yes, for the most part. Like you said, we were in line with the NIC map data on that. I expect us to get a little bit more bullish on rates into 2014, based on what we've seen with demographics, again, heightened occupancy. Everybody is talking about growing rate growth, increasing rate growth into the future. I think we'll certainly be there as well. Some of the other things are small points, but I think they were positives during the quarter. We saw a little bit of a decrease in our concessions overall. If I look at the future, Q2 to Q1 (inaudible) last year, those definitely seem to be moving in the right direction, which is down.

I think the other point of interest is our level of care. We're doing a better job at capturing all of that. We moved all our communities just about there, onto one platform, and we're seeing some improvements there. That will help out a little bit with rate growth this year. But the bulk of it will really come next year.

How does the third party referral expenses work in your P&L? Is that all -- is that in SG&A, or does that run through another expense line for the senior housing properties? Just trying to understand, if you decrease your third party referral fees, how is that going to impact -- does that impact rate growth or impact something else?

Yes Dan, that does, that third party referral fee does enter into our G&A costing.

Okay. And then one last question here. I'm trying to understand, the three senior housing properties that you're looking to sell or S & H is looking to sell, are those more Medicare and Medicaid dependent also? Is there a higher level of Medicare and Medicaid on those as well? Or are those private paying, you're just literally -- [combing] to the 10 properties you're looking to sell as being Medicaid/Medicare heavy?

Those three are predominately not Medicaid/Medicare, they're just the 10 overall that are predominately Medicare/Medicaid.

And are those properties losing money as well, or?

They are challenged properties.

Sorry?

I said, they are challenged properties.

Okay. That is all for now. Thank you.

Okay, Dan, thank you.

The next question is coming from the line of Mike Petusky with the Noble Financial, please go ahead, sir.

Hi, good afternoon, guys.

Hi, Mike.

If you mentioned it, I didn't catch it, and if it was in the release, I didn't see it, so forgive. But what were the revenues associated with the discontinued buildings? And if you have that, could you break it out by skilled nursing as well as the assistive living?

We did issue it in the prepared remarks. It will be filed with our 10-Q. The breakout won't be filed, but the majority of those are skilled, but that we expect to file on Wednesday.

Okay. Is there any way you could give a round number on the aggregate?

I don't think we can right now. I'm sorry.

All right, and then on the -- the rehab hospital, is there anything to account -- that seemed to have -- that segment seemed to have the best quarter it has had in a while. Is there anything that you guys would cite in terms of what was driving that other than -- obviously, I get the occupancy, but what was driving the occupancy, what were you guys seeing?

I couldn't see anything out of the ordinary. Occupancy was up a little bit. You probably had some mix in terms of improvement as well on that, were the two biggest things.

Okay. All right. And then Bruce, I'm always trying to read between the lines on your comments around M&A, are you saying you may be a little more bullish as you look out to the next 12 to 18 months, or am I misreading this as I have occasionally in the past?

Sure. I know you and I discussed my comments last quarter, and last quarter we didn't have a pipeline. Today we do. So, things have definitely improved now than they were. We continue to source deals, and again, we continue to look for managed opportunities as well as opportunities on our own balance sheet.

Okay. When you're talking about the pipeline, you're saying that they are both managed, as well as potential straight-out purchases?

Correct, yes.

Okay. All right, great. All right, thank you.

All right, thank you, Mike, appreciate it.

And at this time, I would like to turn the call back to Bruce Mackey for closing comments. Please go ahead.

Great. Thank you, James, and thank you all for joining us today. We look forward to updating you on our third quarter results in the fall.

That does conclude our call for today. Thank you for your participation and for using AT&T Executive Teleference, you may now disconnect.