Alerislife Inc (ALR) 2013 Q3 法說會逐字稿

Good day, and welcome to the Five Star Quality Care third-quarter 2013 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, Five Star's President and CEO; Paul Hoagland, Five Star's Treasurer and CFO; and Scott Herzig, Five Star's Chief Operating Officer.

The agenda for today's call includes the presentation by management followed by a question-and-answer session. I would also note that transcription, recording, and retransmission of today's 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 security laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, November 12, 2013. The Company undertakes no obligation to revise or publicly release the results of any revisions of 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.

As will be discussed further during today's call, the financial results reported earlier today by Five Star are preliminary and do not include certain noncash income tax items, and as a result, Five Star reported its income from continuing operations before income taxes but not income from continuing operations, income loss from discontinued operations, or net income; and reconciling earnings from continuing operations between interest, taxes, depreciation and amortization, or EBITDA, from continuing operations; and EBITDA from continuing operations excluding certain items to income from continuing operations before income taxes due to recently discovered noncash errors in our historical accounting accruals for income taxes in certain periods.

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'd like to turn the call over to Bruce.

Great. Thank you, Tim, and thank you all for joining us on our third-quarter earnings call. Before I begin to discuss our third-quarter results, I would like to first address the tax issue we outlined in our press release that we issued earlier this morning. In connection with the preparation of our 10-Q for the quarter ended September 30, 2013, we identified errors relating to our accounting for income taxes in prior periods that resulted primarily from the accounting for our deferred income taxes. These items are noncash. The net effect of correcting the errors is expected to increase our net deferred tax assets and to increase our benefit for income taxes. We are currently evaluating our accounting for these items to determine what changes, if any, to our historical our future accounting may be appropriate. We do not expect to file our 10-Q at this time. Instead, we expect to file a notification of late filing on form 12B-25 which gives us five extra days to file our 10-Q. At this time, we can provide no assurances that we will file our 10-Q by the expiration of that five-day extension period.

We have not concluded if we will be required to restate any previously issued financial statements or that any such financial statements should no longer be relied upon, nor have we made a determination as to the effect of these matters on our assessment of the effectiveness of our disclosure controls and procedures or our internal controls over financial reporting. For these reasons, at this time, we're not reporting our income from continuing operations, gain loss and discontinued operations, or net income for the three and nine months ended September 30, 2013, and 2012. All amounts discussed today by my myself, Scott, and Paul will be based on amounts from continuing operations.

For the third quarter 2013, we are reporting revenues of $325 million and EBITDA of $10 million. Starting with a global perspective, our results this quarter are mixed and include the impact of some positive events, along with which we believe are some short-term negative events that should ultimately benefit the Company over the long run. Our private pay independent and assisted living portfolio performed well and showed continued signs of growth. As always, we continue to be focused on the Company's overall occupancy performance and are encouraged by the growth in our private pay businesses over the last quarter and last year. But there is still more opportunity within our continuing care retirement communities and skilled nursing communities to grow occupancy despite a weak skilled nursing operating environment.

We made great progress this quarter repositioning our portfolio towards a more private pay mix. In September, we announced that we are transferring the operations of our two greater Boston inpatient rehabilitation hospitals to a third-party entity affiliated with Reliant Hospital Partners out of Richardson, Texas. We leased these hospitals from Senior Housing Properties Trust, who was selling them to an unrelated third party. We think this is a great long-term move for Five Star given that the Medicare rate environment changed quite dramatically since we took on the operations in 2006, making it difficult to operate with consistent profitability, given the continuing pressure on the Medicare rate environment and operating and economies of scale to be successful in this business. And we didn't have that scale.

The rehabilitation Hospital results are included in discontinued operations this quarter. Our annual rent will be reduced by $11.5 million when the transfer is completed. We will still be responsible for approximately $2 million of rent per year going forward. This $2 million rent is included in our continuing operations.

We also expect to receive approximately $6.5 million to $7.5 million related to working capital we had invested in these hospitals based upon working capital amounts as of September 30, 2013. I do want to point out that last quarter the hospitals produced over $750,000 of EBITDA. While the loss of EBITDA and the continuation of $2 million of rent will be a negative, we believe this transaction is positive for Five Star and our shareholders in the long run as it creates a Company that will then be 100% focused on operating senior living communities. This allows us to continue to focus our resources, as well as makes it easier for the investing community to understand, evaluate, and compare us to our peers.

Now moving on to the details of our operating results for this quarter. Total senior living occupancy for the quarter was 85.9%, which is down 30 basis points from the third quarter of last year but up 30 basis points from the second quarter of 2013. Our owned, independent, and assisted living occupancy was 88.2%. Our leased, independent, and assisted-living occupancy was 89.0%. Our continuing-care retirement community occupancy was 82.9%, and our skilled nursing occupancy was 80.8%. Overall, senior living rates were up 1.5% driven by growth in both private pay and skilled nursing rates. Our skilled nursing rates [were up due] to the mix of our residents offset by the sequestration rates cuts.

Senior living EBITDA from continuing operations was $73.6 million, down 0.9% from last year. The decrease was primarily related to the sequestration rates cuts which again negatively impacted quite Medicare rates in the third quarter. In addition, we experienced some temporary headwinds on the expense front mostly contained within our rehabilitation and wellness business and our captive insurance company. Scott and Paul will provide more clarity on these items later during the call.

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 due to managed communities we acquired since last year. Managed occupancy for the quarter was 87.6%. On a same-store basis compared to the third quarter of last year, managed occupancy was up 260 basis points; revenues grew 4.3%; and EBITDA was up an impressive 7.1%.

On the acquisition fund, since July 1, 2013, we began to manage five senior living communities both during and immediately following the quarter. In August, we began to manage one senior living community with 93 units located in Georgia. In October, we began to manage three senior living communities with a total of 213 units located in Georgia and Tennessee. In November, we began to manage one additional senior living community with 68 units located in Wisconsin. All of these communities are majority assisted living, private pay, and fit within our geographic footprint of operations.

In addition to our acquisition activity, we renewed and extended a lease for four private pay assisted living communities with approximately 200 units with HCP, Inc. during the third quarter. Long term, this is a positive transaction for the Company as these 4 communities produce positive EBITDA and are located in attractive markets where Five Star has a strong presence. However, as a result of this renewal our annual rent payable to HCP increased by almost $1 million. As a result of this renewal in the third quarter, we recorded about $250,000 of additional rent payable to HCP. These communities still produce over $1 million of EBITDA for Five Star on an annual basis, even taking into account the additional rents.

In addition, we expect to invest capital in these communities, possibly expand one or more of the communities, and most importantly, we expect to grow EBITDA from these properties over time.

Turning to our disposition activity, senior housing closed on the sale of one skilled nursing community that we leased and operated with 112 units in August for a sales price of $2.6 million. As a result, our annual rent payable to senior housing has been reduced by $255,000, or 10%, of the net proceeds. The remaining 10 communities included in discontinued operations are currently being marketed for sale, and we continue to make good progress here. We expect some of these communities to be under agreement for sale by year end.

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. I'm happy to report that after the community disposition activity as well as the hospital disposition is completed, over 77% of total Company revenues will now come from residents' private resources. This figure doesn't take into account our managed communities, which are approximately 87% private pay. We've made great strides in increasing our private pay revenues over the last couple of years and will continue to do so going forward. I would now like to turn the call over to Scott.

Thank you, Bruce. As Bruce noted, senior living occupancy for the third quarter was 85.9%, down 30 basis points from the third quarter of last year but up 30 basis points from last quarter. The year-over-year decline was mostly driven by the weak skilled nursing operating environment, partially offset by growth in our private pay business.

Occupancy at our owned, independent assisted living communities was 88.2%, up 60 basis points sequentially and up 210 basis points from last year. Independent assisted living occupancy at our leased communities was 89% in the quarter, which is up 90 basis points from last quarter and up 10 basis points from last year.

Total CCRC occupancy was 82.9% for the quarter, which down both sequentially and year over year. And finally, our skilled nursing facilities reported occupancy of 80.8% for the quarter, which was up 10 basis points from last quarter but down year over year. As a reminder, the majority of our free-standing skilled nursing facilities are in small, rural markets, and much the same as other skilled nursing providers, continue to struggle to improve occupancy in a difficult operating setting.

As of Friday, total senior living occupancy was 85.9%, which is flat to the third quarter's average.

Senior living average monthly rates were up 1.5% from the third quarter of last year driven by rate growth in both our private pay and skilled nursing businesses. Starting October 1, Medicare rates to skilled nursing providers increase 1.3%, and we will continue to target 3% for private pay rate increases.

On last quarter's earnings call, I mentioned the positive momentum we saw in our occupancy numbers, which started back in the latter part of the second quarter and continued into the beginning of the third quarter. For the third quarter, we saw our total leads improve over last quarter by an impressive 14% which directly led to our positive third-quarter occupancy numbers.

In August of this year, we began the rollout of our completely revamped sales training program and plan to have the majority of our community EDs and sales staff fully trained on the program by the end of the fourth quarter. In addition, the changes made to our sales commission program have brought an increased level of accountability to our sales staff and we are beginning to see the desired outcomes. Our private pay results this quarter clearly reflect our overall improvement, and we expect this trend to continue as we work hard to advance these numbers.

Turning now to our rehab to home projects, as you will recall, this program converts existing skilled nursing beds in our CCRCs to high-end private rehab suites. Last quarter, I briefly mentioned our newest Rehab to Home project in Myrtle Beach, South Carolina. This project is now complete, and they began accepting admissions at the end of July. This particular project was slightly different from our other completed Rehab to Home projects in that as part of the upgrade to private suites, we also elected to voluntarily exit the South Carolina Medicaid program at this particular community in favor of additional short-term Medicare beds. I'm happy to report that the Medicare occupancy at this community has grown by 25% since its opening, and overall Medicare rates have also seen improvement.

During the third quarter, we also began two additional Rehab to Home conversion projects at two of our CCRCs, one in Scottsdale, Arizona, and the other in West Allis, Wisconsin.

Both projects are scheduled to be completed before the end of the year, and we are continuing to evaluate opportunities to convert units within our other CCRCs throughout the portfolio. I will continue to update you on the progress on future calls.

Also in the third quarter, we closed, converted, and are repositioning two of our communities, both of which negatively impacted our overall Company occupancy and EBITDARM totals for the quarter. One of these communities will be reopened in December, and the other will be reopened during the second quarter of 2014. We believe that the long-term benefits of closing, repositioning, and ultimately reopening these communities should far outweigh the short-term losses to EBITDARM as these communities will be better able to compete with the changing competitive landscapes in their given market areas.

With regards to expansion projects and the adding of additional units on to our existing communities which we also discussed last quarter, we're continuing to move forward on this front and anticipate having permits in hand and shovels in the ground on three expansion projects totaling 35 additional units by the end of this year.

Before I turn the call over to Paul, I wanted to briefly touch on our outpatient rehab business. Like others in this line of business, we continue to see pressure on revenue growth secondary to the multiple procedure payment review and the therapy caps which were initiated late last year. In addition, during the third quarter we wrote up approximately $500,000 in accounts receivable. Historically, collection efforts for this line of business have been outsourced, but because of the poor collection results, we brought these efforts back in house and do not expect this issue to occur again in the future.

I will not turn the call over to Paul to discuss our financial results in more detail. Paul.

Thank you, Scott, and good morning, everyone, and thank you for joining us today. I will review our year-over-year quarterly financial results for the third quarter of 2013.

Senior living revenues for the quarter were $270.4 million, an increase of $1.8 million from last year. Management fee revenue from the 40 senior living communities we manage 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 48.4% of senior living revenues, a decrease of 50 basis points from last year and a 10 basis points decrease sequentially. Total costs remain well controlled.

Other senior living operating expenses for the quarter were $68 million and represented 25.2% of senior living revenues, an increase of 130 basis points from last year. The year-over-year increase in other operating expenses is due to increase costs associated with outsourcing certain cleaning services which were partially offset by labor reductions and increases in various operating supplies and general liability expenses as well as bad debt. While our general and liability expenses have historically been well controlled, our actuary determined that our reserves required an adjustment or true-up during the quarter. Compared to last quarter, operating expenses increased by 80 basis points, primarily due to the normal seasonal increase in utility costs and general liability expense.

Of note, our utility expense management initiatives are having a positive impact on our cost as we have had a 20 basis point decrease from last year which was 4.2% coming out of the seasonably warm summer during the summer of 2013.

Third-quarter general and administrative expenses during the quarter were $15.1 million, representing 4.6% of GAAP revenues and were a decrease of 30 basis points from last year. If you include the revenues from the 40 communities we manage, G&A is 4.4% of all revenues on a year-to-date basis.

Rent expense for the quarter was $48.7 million, which is 18% of senior living revenues. Interest expense for the quarter was $1.2 million, and depreciation and amortization was $6.8 million, which combined were unchanged from last year.

EBITDA excluding nonrecurring items for the quarter was $10 million, down $2.2 million from last year. This was due primarily to an estimated $1.25 million loss as a result of the sequester that occurred on April 1, 2013; a $450,000 increase in professional liability expense; and a $500,000 increase in bad debt expense.

During July we redeemed the entire $24.9 million outstanding balance of our convertible senior notes. We funded the redemption with cash on hand and $20 million from our $150 million line of credit. As of today, the balance on our line of credit has been reduced to only $10 million.

In closing, we are encouraged with the recent positive trends in occupancy within our core line of senior living business. With our continued focus on improving our sales and marketing execution and culture, we expect to see continued improvement over the next several quarters.

In addition, our expected divestiture of the non-core rehabilitation hospitals and several of our skilled nursing facilities will continue to increase our focus and attention even more so on the core private pay portfolio.

The additional managed communities that we are now managing will also increase our management fee revenues to which there is significant positive flow through.

Thank you and we'd like to open it up for questions now.

(Operator Instructions) Darren Lehrich, Deutsche Bank.

This is Dana Nentin in for Darren this morning. Just on your sales and marketing initiatives, are there any leading indicators that you are tracking that might indicate how you're seeing improvement there?

Well, we track a number of things. We check of our overall leads; we track our conversion ratios; where we get leads from are an important measure for us. We are seeing some improvement overall from quarter to quarter as we initiate our sales programs and our sales training programs.

Okay, great. And then just on occupancy, can you talk a bit about how that trended in the third quarter and how that is looking thus far into the fourth quarter? I think if I recall on the second quarter call, July was trending about 60 to 70 basis points above quarter end Q2 levels, so just curious what August and September looks like.

We had a great month in July. August and September I think were decent, especially in the AL/IL side. We lost a little bit on the skilled side. We did pull some units out on the skilled side, and that impacted a little bit. And Scott talked about that in his prepared remarks in terms of refurbishing a few communities. We hope to get those units back online in December. And then as Scott reported, we're flat today with where we were during the third quarter. So again, the movement has been trending up, especially in the IL/AL side of the business.

Okay, great. Thanks a lot.

(Operator Instructions) Mike Petusky, Noble Financial.

Could you guys run through the managed communities that you guys have signed agreements with -- was it four or five? Could you just run through that? I didn't quite catch that.

Yes, five communities; approximately 400 units in three states I think it is. They came online -- one came online during the quarter; the other four came online off the quarter, right at the quarter. And they were signed on similar terms as are other managed communities.

Okay. And your expectations going forward on that part of your business that you guys will continue to be active and strategic and all the rest of it?

Correct. Yes.

All right. Great. And then just in terms of, I guess, because you all throw a lot of numbers at us, in terms of what you see as short-term expenses that won't really recur on a go-forward basis, could you identify and quantify those?

Yes, Mike. The expenses in Q3 that were certainly higher than our trend were really twofold. Number one, bad debt expense; Scott mentioned it. That was a situation whereby we were outsourcing certain of our billing in the rehab group. We brought that in house. That amounted to $500,000 in the quarter. And then the other expenses are general liability expense. Again, we are fully self-insured using the captive approach. And that was a true-up in the third quarter. Historically, our general liability expenses are actually quite good as we look at it from an actuarial standpoint. So that was a bit of a true-up. So I think you would look at those two, and certainly we believe that they are nonrecurring.

All right. What was the general liability that won't recur? What is that number approximately?

It was $450,000.

Okay. And then M&A outlook, what you guys are seeing in the marketplace. Just any commentary around that.

It still looks okay. We've got a couple of deals that we are working on right now. Nothing in the [P&F] stage, but we're hopeful. I don't expect to close anything additional this year, but early January is a possibility.

Okay. All right. Great. Thanks, guys.

Great. Thanks, Mike.

(Operator Instructions) [Jack Shirck] Jefferies.

A quick question for you about the rehab hospitals going into discontinued ops. Just wanted to make sure I had a couple of numbers straight there. So it generates typically about $750,000 in EBITDA per quarter, and you're going to give up $2 million in rent per quarter. Was that right?

The numbers you have are right. We had a pretty good quarter in the second quarter, so I wouldn't say that always is generating around $750,000 of EBITDA. It fluctuated; that's a business with the patients rolling in and out an average of 14 days. Some quarters we talk about it; we didn't operate profitably if you should go back over the last trailing eight quarters. So you'll see some ups and some downs. And that's a big thing.

But it was $750,000 in the second quarter of 2013. And the rent going forward -- we've got a rent reduction of $11.5 million off of what we were paying at the time was $13.5 million. So $2 million we will still be responsible for.

But again, we think this is a great move for Five Star, really simplify that story. That business is highly, highly dependent upon Medicare revenues and Medicaid, to some extent. It was fraught with regulatory and other reimbursement issues, so it is a business that we are happy to be exiting.

Wait, could you say those rent numbers again? What are you keeping and what are you giving up?

We are giving up $11.5 million, and we're keeping $2 million.

Okay. And it seems that that business overall is a much lower EBITDA margin than your traditional business so it should --

No question; no question.

Right, okay. Just checking. All right, thank you very much.

Thank you. And there are no questions in queue. Please continue.

All right. Well, we'd like to thank you all for joining us today, and we look forward to updating you on our fourth-quarter results in the future. Thank you.

Thank you. And 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.