Alerislife Inc (ALR) 2014 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 are 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 March 17, 2015. 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 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.

Thanks, Kim, and thanks to everyone for joining our earnings call. Before I review our fourth-quarter results, I would like to address two matters which were disclosed in last night's earnings release that significantly impacted our fourth-quarter results.

First, during 2014, as a result of a five-star established compliance program to review medical records related to Medicare billing practices, we discovered potentially inadequate documentation and other issues at one skilled nursing facility.

The compliance review was not initiated in response to any specific complaint or allegation, but it was a review of the type that we periodically undertake to test our compliance with applicable Medicare billing rules. As a result of these discoveries, we've made a voluntary disclosure to the US Department of Health and Human Services Office of the Inspector General or OIG pursuant to the OIG's provider self-disclosure protocol.

While the assessment of these matters is ongoing, we have notified the OIG that we inspect the investigation and assessment to be completed by mid-May.

As of December 31, 2014, we have accrued a revenue reserve of $4.3 million to account for historical Medicare payments we expect to repay, and we have accrued or expensed compliance costs of $3.6 million, which includes an expected penalty amount in certain costs of the investigation of this matter.

I want to reemphasize this was a routine compliance assessment initiated by Five Star in connection with our own compliance program and not because of any specific complaint or allegation involving any of our communities.

I also want to note that as part of our compliance program, Five Star conducted this review at certain other of our skilled nursing facilities and determined that the deficiencies identified are isolated to this one skilled nursing facility.

The second matter I would like to address is that we booked income tax expense of $60.9 million, of which $73.3 million is a non-cash income tax charge recorded to establish a full valuation allowance against the future realization of our net deferred tax assets. Paul will discuss the details of this tax charge in a few minutes.

I do want to stress that both of these matters are either largely one time in nature or nonoperational. All amounts that we discuss for the remainder of this call will exclude the impact of these matters so that investors will get a more accurate understanding of our core results.

Turning to our fourth-quarter results, revenue increased 3.6% compared to the fourth quarter of last year, primarily due to growth in occupancy and average monthly rates at our independent and assisted-living communities. Overall occupancy increased 50 basis points, and we increased rates at our independent and assisted-living communities within our target range of 2% to 3%. EBITDA adjusted for nonrecurring items was $9.2 million, representing a return to a more normal run rate on a dollar basis after what has been a challenging 2014 from an expense standpoint.

Fourth-quarter EBITDAR returned to growth and increased 5% quarter over quarter to $58.8 million. In 2015, we expect continued expansion in recurring EBITDA and EBITDAR as a result of our marketing programs continue to gain traction and fuel occupancy growth, capturing additional rate increases in our communities, keeping routine costs in check, and leveraging the synergies gained through acquisitions and expansions.

To that end, I would like to provide a recap of our growth in 2014, which included one acquisition on our own balance sheet and two management deals. In May, we acquired 100% private pay [family] community in Alabama for approximately $20 million. This acquisition is expected to increase annual revenue by $4.8 million and contribute $2 million of EBITDAR. We now own a total of 31 communities with the goal and capacity to do more deals on our own balance sheet.

In December, we began to manage two private pay communities in Wisconsin, a state where Five Star already has a strong geographic presence. These communities are 100% private pay and include independent living, assisted living, and memory care.

I would like to talk about an additional acquisition we expect to close on our own balance sheet, which we are completing due diligence on. This acquisition is comprised of two communities with a combined total of 152 private pay independent living units located in Tennessee for approximately $26 million. Annual revenue is expected to be approximately $3.8 million with a healthy EBITDAR contribution of approximately $1.9 million. This deal is still in due diligence phase, and assuming the process continues to go well, we would expect it to close later this year.

We plan to remain active in sourcing deals in 2015 and are optimistic that we will continue to expand our private pay portfolio. Currently, we expect our growth to primarily come from acquisitions on our balance sheet or through management arrangements.

At December 31, the percentage of private pay revenues was 77.5%, an increase of 70 basis points compared to the fourth quarter of 2013. Part of our success in driving this percentage higher is due to the disposition program we embarked on more than a year ago. To date, we have sold eight of the 11 communities, the majority of which was skilled nursing facilities and expect to sell the remainder in 2015.

2014 was not a year without its challenges. However, if you look at our core business, we will increase revenue each and every quarter, grow occupancy and rate, initiate marketing programs that are producing results, and maintain effective cost control over routine operating expenses. We are optimistic that as we turn the page in 2015 and expect continued expansion and recurring EBITDA and EBITDAR during the year.

I would now like to turn the call over to Scott.

Thank you, Bruce. First, I will review fourth-quarter occupancy results and provide a quarter-over-quarter comparison for each portfolio. With the exception to skilled nursing, we had solid growth across all property types. Total senior living occupancy increased 50 basis points to 86.2%. Occupancy at our owned independent and assisted-living communities increased 120 basis points to 88.7%. Independent and assisted living occupancy at our leased communities increased 60 basis points to 89.3%. Total CCRC occupancy increased 70 basis points to 83.6%. Our managed occupancy improved 50 basis points to 88.4%, and finally, our skilled nursing facilities required occupancy of 79.3%, down 160 basis points and caused the biggest drag on our overall occupancy, which is why we continue to execute on our strategy of increasing our private pay revenues and limiting our dependence on government-funded programs.

With the exception of our skilled nursing facilities, we made great strides in our occupancy gains during the fourth quarter of 2014. As of last Friday, total senior living occupancy was 85.7%, down since the fourth quarter, which is seasonally typical in the first quarter and primarily related to some issues with the flu in both January and February.

On a more positive note, we are very encouraged by the move in activity we've been seeing so far in the first quarter, which is up 2% over last year. Despite the fact that movement activity has not been enough to offset the move outs, which is primarily due to increased deaths or the need for higher level of care, the momentum we are seeing is expected to bode well for a healthy rebound in occupancy during the second quarter.

Turning now to rates. Overall senior living average monthly rates increased 1.9% year over year in the fourth quarter. Looking at each portfolio, fourth-quarter average monthly rates increased 3.2% at our owned senior living communities, increased 2.4% at our leased senior living communities, increased 2.2% at our CCRCs, and increased 1.3% in our skilled nursing facilities. We will continue to push rate increases across the Company between 2% and 3% throughout 2015.

Turning now to some of our key sales and marketing initiatives, as I mentioned on our last call, we've made significant investments in our digital strategy, and I am pleased to say that Phase 1 of this process was completed during the fourth quarter with the launch of our consolidated website featuring improved search engine optimization and a more user-friendly interface.

Phase 2 is currently in the works and includes live chat functionality, Web marketing campaigns, online resident reviews, and community floor plans and menus just to name a few. These tools and content rich enhancements are expected to improve the conversion rates of our website leads and further enhance our presence on the web.

On the food and dining front, we extended our partnership with celebrity chef Brad Miller who is committed to working with Five Star again throughout 2015. Chef Miller will continue to host community events and cooking challenges which serve productive opportunities for us to host referral sources, entertain residents, and ultimately improve occupancy.

Occupancy at the 10 communities where we hosted events last year experienced significantly higher growth rates in our overall portfolio. Our overall partnership with chef Brad continues to bear fruit, and we have plans to host 15 more community events in 2015.

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. As I mentioned on the last call, we have two projects underway. One is in Kentucky, and the other is in South Carolina. On the expansion front, we have two projects in process, one in Texas and the other in Tennessee. These two projects will add a combined total of 50 units split between assisted living and memory care. We currently operate at 100% occupancy in both these communities, and as a result of our expansion investments, they will be better able to accommodate the market demand and significantly drive EBITDAR at these communities. Given the success of these projects, we are actively evaluating additional rehab to home and expansion opportunities throughout our portfolio.

I will now turn the call over to Paul.

Thank you, Scott, and thank you for joining us today. I would like to start with a discussion about the two matters that Bruce has covered in his opening remarks.

First, our Q4 results were impacted by the self-disclosed compliance matter that Five Star discovered by its own internal audit and compliance oversight. This resulted in a reduction of $4.3 million of senior living revenues and EBITDAR specifically within our skilled nursing results.

In addition, there was $3.6 million of incurred expenses that are in our senior living other operating expenses and our skilled nursing results. During my prepared remarks today, I will exclude these items from my discussion and analysis as they are one time and nonrecurring in nature.

Second, the Company has established a full valuation allowance against its net deferred tax assets. As such, we have recorded increases to our valuation allowance totaling $73.3 million non-cash during the year ended December 31, 2014. As a result of losses primarily due to the compliance matter and recent accounting costs for the 2012 restatement, the Company concluded that it expected to be in a three-year cumulative loss position at the end of the three-year period. While the Company has successfully utilized over $130 million of federal net operating losses in the last seven years and used $28 million in 2012 alone, we have recorded this allowance at this time.

Our net loss from continuing operations was $70.1 million and $79.4 million for the fourth quarter and the full year respectively, primarily due to this valuation allowance recorded in Q4.

For the fourth quarter, senior living revenues increased comparatively by 3.6% to $278.9 million in the fourth quarter of 2014 from $269.1 million in the fourth quarter of 2013. Management fee revenues were $2.5 million and $9.8 million for the fourth quarter and full year respectively.

Senior living wages and benefits for the quarter were $131.1 million, which are 47% of comparative senior living revenues, an improvement of 180 basis points from the fourth quarter of 2013. We experienced improvements in virtually all areas of wages and benefits. Employee health insurance costs have returned to average levels versus the higher costs experienced early in the year. Other senior living operating expenses, when adjusted for the compliance matter, were 26.7%, up 160 basis points in the fourth quarter of 2013.

As we previously mentioned, the Company has experienced an increase in purchased service and outsourced a portion of its housekeeping expenses. This has helped us reduce wage and benefit costs and we believe has improved the appearance of our communities.

The Company has also experienced higher marketing costs associated with the investments in some initiatives to increase occupancy, and as Scott as mentioned, these investments are paying off given the improving move-in activity.

General and administrative expenses were $18.2 million for the quarter and increased 3% over the costs incurred in the fourth quarter of 2013. While we did incur additional one-time accounting expenses totaling $1.2 million in Q4 as we became current with our 2014 quarterly filings, we are pleased that we have filed our 2014 10-K on a timely basis. Our accounting expenses in 2015 are expected to return to the levels that the Company incurred in 2012.

Recurring G&A costs for the full year were $66.5 million or 4.6% of total revenues, including our 46 managed properties. Rent expense for the quarter was $49.6 million or 17.8% of comparative senior living revenues and for the full year is 17.9%. It continues to decrease as we acquire properties on our balance sheet, and in Q4 2014, it decreased 30 basis points versus the fourth quarter of 2013. Interest expense was $1.3 million, and depreciation and amortization was $8.3 million for the quarter.

As we've discussed, EBITDA and EBITDAR were adversely impacted by $7.9 million due to the compliance matter and $1.2 million due to the impending restatement costs. EBITDA excluding these nonrecurring items was $9.2 million for the quarter, an increase of over 30% from last year. And recurring EBITDA was $58.8 million for the quarter.

Now I will review our liquidity, cash flow, and selected balance sheet items. Cash flow from operating activities was $22.3 million for the full year. For the full year, we invested $49.9 million of capital into our communities and sold $25.8 million of long-term capital improvements.

At year-end, we had $21 million of cash and cash equivalents. At year-end, we had $357.2 million of net property and equipment, which includes 31 properties directly owned by Five Star, 11 of which are unencumbered by debt. At year-end, we had $35 million outstanding on our two credit facilities and $51.2 million of mortgage notes payable. We are currently at $30 million outstanding out of our total availability of $175 million. At the end of the quarter, our leverage was 27% of book value and 16% of assets. We believe we are in compliance with all material terms of our credit, note, and mortgage agreements.

In summary, while 2014 was a challenging year for Five Star, our core business continued to grow, and we made good progress at our communities. Our sales and marketing programs are gaining traction as evidenced by our gains in revenue, occupancy, and rate throughout the year.

In addition, recurring EBITDA and EBITDAR began to return to a more normalized run rate in the fourth quarter, and we expect this will continue to grow throughout 2015.

With that, Bruce, Scott, and I are happy to take your questions. Thank you.

(Operator Instructions). Dan Bernstein, Stifel.

Do you guys have any expectations you can provide on what you think occupancy rate margin could be for 2015? Or at least certain -- obviously you can't predict exactly, but what are your internal expectations for how you expect your performance to improve in 2015 over 2014?

We expect improvements, and as Scott already said in his prepared remarks, we are seeing some of our initiatives pay off already in 2015 in terms of leads are up, our move-ins are up year over year so far unfortunately, like our competitors have also publicly announced already that unfortunately moveouts have not kept pace with the state. But we expect that to turn around in the second quarter, and seasonality plays a big part in that.

The NIC MAP is projecting a 50 basis point -- roughly a 50 basis point increase in occupancy. We don't see why we should be able to keep pace with the NIC map.

In terms of rate growth, I guess last year was a little bit under 2% calculated at least on private pacing for housing. Is that the expectation for 2015, or do you think you can improve some rate in 2015 or 2014?

I think you could also include in our SNF rate growth as well in that amount. If you look at our private pay rate growth, we were higher than that, and we expect that we should be able to keep pace with what we did in 2014 on a private pay portfolio.

Okay. And then in terms of the impact of the flu, how would you compare this year's flu season to, say, the 2012/2013 flu season that was difficult? Are you starting to still -- should we expect occupancy to dip further at least on the average side dip into second quarter like it did in 2013, or are you seeing some differences in terms of the moveouts this year versus that 2013 period? Just trying to get a sense as whether occupancy is going to dip further in the second quarter and then rebound in the second half or whether we will might be able to get a little bit of a bump in the second quarter?

Yes, no, I think it's a good question. I think the flu is probably not as prevalent this year as it was two years ago. It's definitely worse than it was last year and how fast we recover from it remains to be seen. But, again, I can point to what we've disclosed so far in January and February, move-ins are up. So we didn't see that two years ago to the extent we're seeing at this year. So we expect to recover probably quicker than we did two years ago.

Two years ago, occupancy bottomed in the first month of the second quarter, I believe, right?

Yes.

Okay. And then just on the SNF compliance issue, you said it's just isolated to one property. Are you still examining other skilled nursing properties, or is it -- are you fairly certain that it's probably just going to stay isolated to this one property? In other words, if it's something that was in your -- that could be systemic, or was it something isolated to say what ED or whoever the person in charge of the accounting they are billing that one facility is responsible for. I'm just trying to think about whether it's systemic or something just isolated?

At this time, we believe it is not systemic, and it is isolated to that one facility, and you mentioned ED, and that's exactly right. I think we've got a good long-term history of compliance, and we just had employees at the facility that involve our policy procedures, and we conduct a number of reviews on an ongoing basis year after year. And again, we think it's isolated at this one facility at this point in time.

Okay. That's all for me. I'll hop off. Thanks.

Brian Tranquilut, Jefferies.

First question for you. Just to kind of frame the guidance discussion, it seems like -- so you are expecting occupancy to improve over the course of the year and rates and margins at the same time, is that right? (technical difficulty) describing to us how you would expect the progression over the course of the year?

You are a little garbled to some extent, but I think you -- no, we don't give guidance as you know, but we do overall. We are saying that based on what we've seen so far in January and February and what our internal reports are showing that occupancy is -- move-ins, again, have gone up, haven't kept pace with moveouts, but we think there's a significant seasonality in that. We know that we're going to get rate growth at 78% of our communities in terms of the private pay, and it's going to be in that 2% to 3% range, probably close to the 3% range. We expect that labor and most routine operating costs will remain in check. Nothing at this point indicates that what we've seen in the past shouldn't continue in the future.

Got it. And then in your filing, you announced the acquisition of two IL communities in Tennessee. Do you mind just discussing the financial impact of that in terms of the costs and the revenues that you are expecting for those deals?

Yes, give me a second here. It's two communities, 100% private pay, roughly 150 units. About $26 million, there will be some debt assumed with the deal. Annual revenues from the two communities are about $3.8 million with EBITDAR contribution of $1.9 million.

Got it. And then last question for me, you alluded to your digital marketing program in your prepared remarks. Are there any metrics that you can give us around that in terms of the contributions that you have seen so far or even qualitative comments on how that is driving occupancy growth? Thanks.

Yes, so far, we are seeing some nice activity on the lead generation side. If you look at our leads, Q1 so far we are up 6% year over year. We said our move-ins are up. We just having kept pace with the deaths and the move-outs that were really seasonal in nature and related to the flu.

We've had some good activity with the chef Brad initiative that we put out there. We're getting to be known as the place that provides a high-quality food product, and people are coming in there just to experience that. We've got a lot of sales training that goes on regularly for our buildings, and a lot of it is focused on the dementia care side where we've got some opportunity to move the needle. So there's a lot of programs that we work at regularly to continue to move our occupancy needle.

And then at this time for closing remarks, I turn the call back over to Mr. Bruce Mackey. Please go ahead, sir.

Great. Thank you very much. Well, listen, I would like to thank everybody for joining our call this morning, and we look forward to updating you on our future progress.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.