Alerislife Inc (ALR) 2013 Q4 法說會逐字稿

Good day and welcome to the Five Star Quality Care 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 Director of Investor Relations, Ms. Kimberly Brown. Please go ahead.

Thank you, and good morning, everyone. Joining me on today's call our Bruce Mackey, President and CEO; Paul Hoagland, Treasurer and CFO; and Scott Herzig, Chief Operating Officer. The agenda for today's call includes 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 are 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, September 18, 2014. 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 to place undue reliance upon any forward-looking statements.

Now, I would like to turn the call over to Bruce.

Great. Thanks, Kim, and thank you all for joining us on today's call on such short notice. Before turning the call over to Paul to review our fourth-quarter and full-year 2013 results, I would briefly like to address the length of the audit process for both the restatement and the 2013 10-K. The errors identified as part of the restatement were primarily related to accounting for non-cash income tax items, which tend to be very complex and time-consuming. While we would have preferred to conclude this process more quickly, the period it took is not atypical, given the complexity of these issues.

In terms of the 10-K, there were three factors that cause this to be a very lengthy and labor-intensive process. First, while a typical year and audit takes approximately four months from start to finish, the year and audit process was completely put on hold during the restatement, which concluded in April. Second, there is an increased scrutiny overall public companies with regard to Sarbanes-Oxley 404 compliance controls. The reality is this is a new world where public accounting firms are under unprecedented scrutiny and oversight. Items that historically were quick and easy to audit no longer are, especially once you have had a restatement.

Lastly, and Paul will discuss this in his prepared remarks, during the 2013 10-K audit process we identified timing issues related to some of our accounts payable and accrued expenses. Historically, our controls around accounts payable were not designed to accrue routine small dollar expenses. However, when your financial payments are open for five months or so after year end you gain perfect clarity into what your actual expenses versus your accrued expenses and estimates should have been. We identified predominantly smaller dollar invoices, primarily at the community level, that were not accrued for at year end. We have similar situation in both 2012 and 2011.

It was concluded that our results from these periods were not materially misstated. However, the cumulative effect would have been material to our year-end 2013 results. And as such, we revised 2012 and 2011 for these immaterial changes. Let me emphasize the adjustments were minor and no impact on our cash flows from operating, investing, or financing activities. This last revision to our financial statements took the balance of the summer to complete.

That said, we are pleased to have resolved these matters, and would like to thank our shareholders and analyst for their extreme patience. We will continue to work hard to become current with our first and second quarter 2014 filings and do not expect the process to be nearly as time-consuming, given that these are quarterly filings. We look forward to fully focusing on running our business and executing on our strategy to provide enhanced shareholder value.

With that I would like to turn the call over to Paul to review the net effect of our restatement and our financial results. Paul?

Thank you, Bruce. And thank you for joining us. First, I'd like to take a minute to walk through the net effect of our restatement, which was filed earlier this year, on April 15, 2014. In late November 2013 it was determined by Five Star and our auditors that restatement of certain previously issued financial statements would be required because of inaccuracies primarily with the Company's non-cash income tax accounting. The Company had identified the issue during the third quarter closing and had brought it to the attention of our auditors and audit committee. As you know, income taxes is the primary reason for restatement and is extremely complicated due to the judgmental considerations within it.

The complexities were further increased by the retrospective adjustments needed to all periods for the divestitures of our pharmacy, rehabilitation hospital, and discontinued communities in recent years as the Company has been executing strategic initiatives to increase the overall percentage of private pay revenue. The net impact of correcting the errors in the 2012 10-K/A filing resulted in an increase to our shareholders' equity of $6.7 million and $8.1 million at December 31, 2012, and 2011, respectively. Our net income decreased by $1.4 million and increased by $6.6 million, respectively, for the same time period. The net income increase over the two years was $5.2 million and was primarily due to the Company's prior practice of accounting for deferred state income taxes based on a blended state tax rate approach, which until recently, was a standard practice.

Also as Bruce outlined and as a result of the delay of our year end 2013 10-K filings due to the income tax restatement, the Company performed a detailed look-back analysis for the first five months of 2014 with regards to our accounts payable and accrued expenses. The Company processes over 400,000 invoices totaling $265 million annually for its other senior living operating expenses. This is an average of approximately $660 per invoice. The majority of these expenses and accruals originate in the 260 communities that we operate. As Bruce stated, historically our controlled focus on accruing larger dollar expense items. Included in our 10-K is the detail which shows the $2 million increase in our 2012 other senior living operating expenses and a $944,000 decrease in our 2011 other senior living operating expenses. Over the two-year period of approximately $500 million in other senior living operating expenses, the net revision is $1.1 million or 0.2 of a point. Going forward, this immaterial amount as now accrued should not change significantly from period to period.

Turning to the fourth quarter, senior living revenues were $269.1 million and were flat to the prior year. For the full year senior living revenues were just under $1.1 million, an increase of $3 million from last year. Revenue was negatively impacted by the sequestration-mandated Medicare payment rate reduction that went into effect April 1 of 2013 and a decrease in occupancy, partially offset by increases in our average monthly rates to residents who pay privately for our services.

Management fee revenue from the 44 senior living communities we manage was $2.4 million for the quarter. For the full year management fee revenues were $9.2 million, an increase of 59%, primarily as a result of the increased communities we took on during the second half of 2012 and in 2013. We have had early success with our managed properties oversight. We are reporting a loss from continuing operations for the fourth quarter of 2013 of $3.3 million or $0.07 per basic and diluted share, partially due to the flat revenue and primarily as a result of increased expenses, many of them which are non-recurring in nature and I will discuss them in a moment.

For the full year 2013 income from continuing operations was $3.4 million or $0.07 per basic and diluted share compared to $10.6 million or $0.23 per basic and diluted share for the year ended December 31, 2012. Senior living wages and benefits for the quarter were $131.4 million and represented 48% of senior living revenues. While this is unfavorable to the 47.8% costs in the previous year's fourth quarter, for the full year our senior living wages and benefits increased by only 20 basis points. During the fourth quarter higher cost for employee health benefits and workers' compensation claims were the primary causes for the increase.

Other senior living operating expenses for the quarter were $67.5 million and unchanged from last year and for the full year were $265.8 million, an increase of 1.5%. As a percentage of senior living revenues, our operating expenses during the quarter were 25.1% and unchanged from last year. And for the full year other senior living operating expenses were 24.7%, up 30 basis points over 2012. A combination of utilities, purchased services for cleaning, and professional liability expenses were the primary causes.

Fourth-quarter general and administrative expenses were $17.7 million. Included in the quarter were $1 million of nonrecurring expenses associated with the cost of the restatement. Excluding this one-time nonrecurring expense, G&A costs were 5.1% of GAAP revenues and 4.8% of total revenues including our 44 managed properties. G&A for the year was $63.5 million. Excluding the restatement costs, G&A were 4.8% of GAAP revenues and 4.5% of total revenues including the managed properties.

Rent expense for the quarter was $48.8 million, which is 18.1% of senior living revenues. For the full year rent expense was $193.8 million, which represents 18% of senior living revenues, a 30-basis-point increase from 2012. Interest expense for the quarter was $1.2 million and depreciation and amortization were $7.3 million.

EBITDA excluding nonrecurring items for the quarter was $7.1 million, a decrease of $4.2 million from last year. EBITDA was primarily impacted by $3.5 million of higher cost of employee health benefits and workers' compensation claims, $1.1 million of lost EBITDA due to the four communities under renovation -- and Scott will discuss this in a bit -- audit fees of $1 million associated with the restatement and rent increases of $1 million. EBITDAR excluding nonrecurring items for the quarter was $55.9 million versus $59.1 million in the prior-year, and for the full year it was $232.6 million versus $234.5 million in the prior year.

Now I'll review our liquidity, cash flow, and selected balance sheet items. Cash used in operating activities for the quarter was $2.6 million and operating cash flows for the full year were $35.8 million. During the quarter we invested $16.5 million of capital into our communities [and sold] $4.7 million of long-term capital improvements. And at December 31, 2013, we had cash and cash equivalents of $23.6 million. At quarter end, we had $340.3 million of net property and equipment, which includes 31 properties directly owned by Five Star, 11 of which are unencumbered by debt. We had $37.6 million of mortgage notes payable, and at year end we had $35 million outstanding in our two credit facilities and are currently at $20 million today. We have a total borrowing capacity of $175 million. At the end of the quarter our leverage was 21% of book value and 12% of assets. We believe we are in compliance with all material terms of our credit, note, and mortgage agreements.

Now, I like to turn the call over to Scott, who will walk you through our key operating results and initiatives. Scott?

Thank you, Paul. I'm pleased to report that we've seen improvement in both occupancy and rate during the first half of 2014. As of today, total senior living occupancy stands at 86.3%, which is 70 basis points higher than the fourth quarter's average of 85.6%. Total senior living occupancy was 85.8% in the first quarter and 85.7% in the second quarter. Occupancy at our owned independent assisted-living communities was 87.5% in the fourth quarter, 87.4% in the first quarter, and improving to 87.6% in the second quarter. Independent assisted-living occupancy at our leased communities was 88.7% for the [first] quarter, 88.6% in the first quarter, and improved to 88.9% in the second quarter. Total CCRC occupancy was 82.7% for the fourth quarter, improving to 83.6% in the first quarter and was 83.1% in the second quarter.

Our skilled nursing facilities reported occupancy of 80.9% for the fourth quarter, 80.4% in the first quarter, and 79.7% in the second quarter. As a reminder, the majority of our freestanding skilled nursing facilities are in small rural markets and continue to struggle to improve occupancy in a difficult operating setting, which only supports our strategy of continuing to increase our private pay revenues and limit our dependence on government-funded programs.

And finally, our managed occupancy in the fourth quarter was 87.9%, improving to 88.8% in the first quarter, and 88.5% in the second quarter. Overall senior living average monthly rates increased 0.5% year-over-year in the fourth quarter, 1.2% in the first quarter of 2014, and a healthy 2.0% in the second quarter of 2014, which is back within our targeted range of 2% to 3% year-over-year growth.

Looking at our owned and leased communities, average monthly rates were solid and increased 1.9% in the fourth quarter of 2013, 2.0% in the first quarter of 2014, and 2.2% of the second quarter of 2014. We are pleased with the improvements we are seeing in this side of our business for the first half of 2014. I would expect these positive trends to continue.

While the restatement and 10-K filing impacted both Paul and Bruce's time and attention, it is important to note that I, along with my team, have not been impacted and have been able to focus 100% on the operations of our business and the rollout of some key initiatives, a few of which I would like to briefly share. First, we completely revamped our sales training program late last year and have conducted intense mandatory training for every sales team member and ED in the Company, which focused on external lead development and effective closing techniques. More than 500 team members participated, making this our largest training product in Company history. Going forward, the new sales training program is serving as an effective platform for onboarding new team members and is conducted at the beginning of their Five Star tenure.

On top of the rollout of our sales training we are in the process of overhauling Five Star's digital presence, which includes developing a brand-new website along with new web marketing campaigns. Given that 70% of our leads come in through online channels, consistently upgrading our technology initiatives to engage and convert more of these leads is critical to our business. All of our sites are currently being rebuilt with improved search engine optimization capabilities and post-launch later this year we will be rolling out some new, aggressive online marketing campaigns. We believe that once our new sites are optimized, coupled with these campaigns, we will generate superior leads from both a quantity and quality perspective.

And finally, in an effort to further differentiate ourselves from the competition and enhance our dining program, we've partnered with an unbelievably talented celebrity chef named Brad Miller, who is the executive chef at the renowned Inn of the Seventh Ray restaurant in Los Angeles and who was a former contestant on Hell's Kitchen, among numerous television appearances. To date, Chef Miller has filmed a series of video demonstrations for our residents and chefs and added some signature items to all of our menus. Chef Miller is currently in the process of hosting nationwide events for our residents and cooking challenges with our chefs. Not only are these events providing a little inspiration to our already talented chefs, but they are also a fantastic opportunity for us to host referral sources, create positive buzz in our communities, and ultimately improve occupancy. Countless studies continue to show that food and dining is a major consideration for seniors and their families when choosing a community, and engaging with Chef Miller further helps to differentiate Five Star.

Now turning 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. First, I want to provide an update on the success of our Rehab to Home project in Myrtle Beach, South Carolina. 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. This project started to open the middle of last year and is exceeding our expectations. This past March the memory care unit construction was completed at this community as well. Move-in activity has been brisk for this unit, and as of last week we were already 80% occupied.

Last year we also begin two additional Rehab to Home conversion projects at two of our CCRCs, one in Scottsdale, Arizona, and one in West Allis, Wisconsin. The Scottsdale property was completed and opened in March of this year and is filling up as expected. The West Allis project was a large multistage renovation project that saw the first floor open in January and the remaining two floors opened in July. Move-in activity has been robust, and the local area around the community is excited with the new upscale short-term rehab options that we can now offer the city of West Allis. We are continuing to evaluate opportunities to convert units within our other CCRCs throughout the portfolio and will update you on progress on future calls.

One last conversion project we mentioned on earlier calls -- we closed, converted, and repositioned a community in Alabama. This community was recently reopened and is filling up as expected. As we had mentioned previously, we believe that the long-term benefits of closing, repositioning, and ultimately reopening these communities will far outweigh the short-term losses to our Company's occupancy and EBITDARM, which we estimate was approximately $1.1 million for the fourth quarter. As a result of our investments these communities will now be better able to compete with changing competitive landscapes in their given markets. I will now turn the call over to Bruce.

Great. Thank you, Scott. I want to take a moment to talk about our strategic initiatives. We continue to make progress on eliminating our exposure to government-funded programs. In the fourth quarter our revenues derived from residents' private pay sources at our owned and leased communities increased 70 basis points to 76.8% compared to a year ago. While we have made substantial progress our strategy is to drive our percentage of private pay revenues even higher, and over the past 12 months we continue to reposition our portfolio to support this important initiative.

To that end, on December 31 and ahead of schedule, we announced that we had completed the disposition of our two greater Boston inpatient rehabilitation hospitals. The rehab hospital results were included in discontinued operations during the second half of 2013. Our annual rent was reduced by $11.5 million. However, we are still responsible for approximately $2 million of rent per year going forward, which is included in our continuing operations.

This transaction is a great long-term move for Five Star, given that the Medicare rate environment changed quite dramatically since we took on operations in 2006, making it difficult to scale the business and operate with consistent profitability. With the completion of this transaction, Five Star is now 100% focused on operating senior living communities. In addition to the rehab hospital sale, senior housing closed on the sale of one skilled nursing community that we leased and operated with 112 units in August 2013, one underperforming assisted living community we had leased and operated with 48 units this past January, and two skilled nursing facilities we had leased and operated with a combined total of 155 units in June. The remaining seven communities, which are primarily skilled nursing facilities, are included in discontinued operations and are currently being marketed for sale.

Four of the seven communities with a combined total of 278 units are currently under agreement to be sold. We expect to sell this communities by the end of 2014, which will strengthen our mix and enable us to focus on our core business of operating private-pay senior living communities in areas where we have geographic concentration.

Recapping our growth in 2013, we began to manage five senior living communities with a total of 374 units. In August we begin to manage one senior living communities 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 these communities are majority assisted living, private pay, and fit within our geographic footprint of operations.

We also renewed and extended the lease for four private pay assisted-living communities with approximately 200 units with HCP Inc. during the third quarter. These four communities produced 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, and during the second half of 2013 we recorded about $500,000 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 them and, most important, we expect to grow EBITDA from these properties over time.

Turning to our more recent acquisition and growth initiatives, in May of 2014 we acquired a senior living community in Dothan, Alabama on our own balance sheet for approximately $20 million, which includes the assumption of approximately $14 million of mortgage debt and excludes closing costs. This is the first acquisition we have done on our own balance sheet since 2011 and it was funded with cash on hand and borrowings under our revolving credit facility. This community is a perfect fit for Five Star, as it is 100% private pay and is located where we have a strong geographic presence. The community has [116] units comprised of independent living, assisted living, and memory care with average monthly rents of $3700, and average occupancy has consistently exceeded 95%. This transaction is expected to increase annual revenue by $4.8 million and contribute approximately $2 million of EBITDA.

In July of 2014 senior housing entered an agreement to acquire an assisted living facility in Wisconsin, which we expect to begin managing by the end of the year. This community is located in an area where Five Star has a strong geographic presence, has 52 units, and is 100% private pay. We expect to remain active in sourcing deals for the remainder of the year and are optimistic that we will continue to expand our private-pay portfolio.

Although 2013 had some challenges, we expect to see significant improvements as we progress through 2014 and beyond, especially given our increasing private-pay mix and the revenue producing improvements we are making to several of our communities. Occupancy growth remains one of our highest priorities. Current occupancy of 86.3% is a healthy increase of 70 basis points from our fourth-quarter average. Increasing rate is another priority and a very powerful agent of revenue growth. Average monthly rate for the fourth quarter was up 0.5% compared to last year. However, the average monthly rate for our owned and leased independent and assisted-living communities increased by 1.9%. Like occupancy, average monthly rate also improved in the first and second quarters and were within our target range of increasing private-pay rates between 2% and 3% on an annual basis.

Before we open up the call for questions, I would like to provide some color on the first six months of 2014. At this point in the process, we are extremely limited as to what we can discuss. As you can imagine, our accounting and financial reporting department has been entirely focused on issuing our 2013 10-K. However, as we just reported, both occupancy and rate have ticked up this year. And, as a result, we expect to report slight increases in revenues for both the first and second quarter of 2014 over their previous quarters, respectively. We believe the year-over-your top-line growth is due to the positive impact of our operational initiatives.

On the expense side our labor costs remain very well control during the first half of 2014. However, some of the increased health and workers' compensation claims expense that Paul noted in his prepared remarks, did carry over to the first and second quarters. in addition, the earnings drag related to our renovated properties that Scott discussed have also carried over into the first quarter but have started to moderate in the second quarter.

Given these trends, our expectations right now before taking into account any one-time accounting expense associated with our recent financial reporting is that the EBITDAR for the first quarter of 2014 will be slightly lower than the fourth quarter of 2013, but that EBITDAR for the second quarter of 2014 will improve and will be higher than both the fourth quarter of 2013 and the first quarter of 2014. At this point, though, I can't really predict what our final results will be and it is possible that any statements that Paul, Scott, or I have made about the first quarter or second quarter results or operating metrics may change and that change may be material.

Thank you for your continued patience. We would now like to open up for questions.

(Operator Instructions) Darren Lehrich from Deutsche Bank.

You gave us those spot numbers for occupancy and rate for Q1 and Q2 of this year. But I was hoping you could give us a little color on how occupancy has progressed through the year.

Sure. It has progressed up. We've seen better metrics in terms of our move ins, our lead volume is slightly up and occupancy has progressed up, mostly in our independent assisted living communities.

Okay, great. Thank you. And could you give us a little color on the workers' comp expenses that have ticked up? Is that an anomaly or is that something that you expect to be higher going forward?

I think we would characterize it as an anomaly. We really did a pretty significant overhaul to the way we administer workers' compensation claims management here in 2011. And in 2012 and in early 2013 we were seeing some of the fruits of that from the standpoint of reserve reductions. Again, workers' compensation has, in some cases, an 18-month trail to it. As we entered the last half of 2013, we saw slight upticks in workers' compensation claims in the fourth quarter of 2013, and they were rolling over slight decreases at the end of 2012. Again, our programs are fully self-insured and self-funded. And when you look at whether it's things like the workers' compensation modification factor or the pure premium, which is your actual claims as a percentage of payroll, the Company does very well by industry standards. And we will continue to find ways to make improvements.

I think the other thing that I'd add -- workers' compensation claims really comes down to frequency and severity. And frequency really held, I think, pretty well. We did see a slight uptick in severity, which we are working to bring back down. That was another thing that really drove that a little bit as well.

(Operator Instructions) Daniel Bernstein with Stifel.

If you expected one-half 2014 EBITDAR a little bit lower than the second half of 2013, I assume that you had some issues with expenses on the weather side in the first quarter. If you could talk a little bit more about your expenses in the first half of the 2014 versus the second half of 2013, if you could.

I really can't get into it too much, Dan, just because we haven't really closed those periods down. You've got to take into account we really had to start that process, we had to finish the last process, and we finished it last night at 5:30. But obviously you had -- the polar vortex impacted us, like all companies. So you will have some of that. And then I did mention some of the workers' claims and health insurance expenses that Paul discussed did carryover a little bit.

Okay, okay. Is there a timeframe to complete the 1Q and 2Q quarterly reports? Do you have a sense of when that might be completed? I assume those are a little bit easier than the 10-K?

You are correct. We are not going through an audit process; they are easier. There is no timeframe other than saying it's as quick as possible. So we are refocusing all our efforts to get that done and to get current as quick as possible. I really can't predict right now how long that will take.

Okay. Are there other assets aside from the seven senior housing assets that you are selling with S&H that you are thinking about disposing at this point? Or are you mainly done with the culling of the portfolio?

I would say we are never really done with the culling of the portfolio. We look at it from time to time. And it's possible that once we are finished with these seven that we will take a look at it and maybe move in some others.

Okay. And on the flipside of that, you did acquire an asset -- I guess it was the $19.9 million asset. Are you looking, once this financing/accounting restatement is completed, to maybe pick up the pace of acquisitions? Once you get free and clear of the accounting restatement, what is the going strategic plan that you really want to concentrate on?

Again, if I harken back to what I said, our strategic plan is to continue to grow our private payments of properties. And I just said that might include culling of some of our existing portfolio. We will continue to work via leasing assets, managing assets, or buying our own balance sheet. This restatement did not have a huge impact on our ability to acquire properties and do additional management deals. We did that one in Alabama, like you mentioned. We did another four or five at the end of last year. We've got one under our belt so far this year on the management opportunity. We expect that we are very close on another management opportunity. And we still continue to look at all of our properties. We are very selective in what we take on, but we are toying at least probably one or two properties a week across the country and very few make it up to our criteria of what we want to take on, but the ones that we do we are pretty happy with. So I can't say the restatement really impacted that too much. It's probably us just being a little bit more selective than maybe some of our competition.

Do you feel like you need a lot more scale, though, than what you have now? Brookdale is sitting at 120,000 units. You are at, what, about 30,000 or so? Do you feel like you need to get a lot larger than where you are today?

No. We are the second-largest public senior living operator now, after Brookdale. So there's a huge span between us and them. I don't think we need to scale rapidly. Would I be opposed to it? No, if the right deal came along. But I think we do pretty good where we are right now.

Okay. Yes, I was just trying to understand the pace of the strategic change that you were talking about.

It's really opportunity based, and it's tough to say we are going to go out and we want to do 2000 units next year. Sure, we'd like to do it if the right units were there. But again, it's opportunity based.

Okay, I'll hop off. Thanks.

At this time there are no further questions in queue. Please continue.

Well, we would like to thank you all for joining us today, and we look forward to updating you on our first-quarter results as soon as it is available. Thank you.

Thank you and that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.