Alerislife Inc (ALR) 2015 Q1 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 conference call over to the Director of Investor Relations, Ms. Kimberly Brown. Please go ahead.

Thank you and good afternoon, 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, May 11, 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 the 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 thanks everyone for joining us.

I would like to start out today's call with an acquisitions update as we made meaningful progress since the beginning of the year. On May 1 we began to manage 14 high-quality private pay [CNL] communities. These high-end communities are part of a larger acquisition by Senior Housing Properties Trust of the [CLE] component of CNL Lifestyle Properties. The 14 communities have approximately 900 assisted living units and are located across 4 states. This is the largest management deal Five Star has done with SNH since 2011 and we expect additional management fee revenues of approximately $1 million per annum.

In addition to these 14 properties, we expect to begin to manage another community SNH recently agreed to acquire in Georgia. This particular community has 40 brand-new private-pay independent living units and is adjacent to an assisted living and memory care community we currently manage which will create positive synergies.

And finally, as discussed on our last earnings call we are completing our diligence on an acquisition we expect to close on our own balance sheet during the second quarter. 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 revenues are expected to be approximately $3.9 million with a healthy EBITDAR contribution of approximately $2 million. We are extremely pleased with our private pay acquisition activities thus far and plan to remain active in sourcing deals in 2015.

Before I review our first quarter results, I would like to provide an update on the compliance review at one of our leased skilled nursing facilities. As a reminder, this review began as a result of a Five Star-established compliance program to review medical records related to Medicare billing practices, during which we discovered inadequate documentation and other issues at one skilled nursing facility. 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 the OIG, pursuant to the OIG's provider self-disclosure protocol.

As of March 31, 2015, we accrued an additional revenue reserve of $2.4 million to account for historical Medicare payments we expect to repay. And we accrued or expensed additional compliance costs of $2.3 million, which includes an expected penalty amount and certain costs of the investigation and assessment of this matter. We expect to deliver our final submission to the OIG in the coming days.

I do want to stress that this matter is largely one-time in nature and non-operational. All amounts that we discuss in the remainder of this call will exclude the impact of this matter so that investors will get a more accurate understanding of our core results.

Turning to our fourth quarter results. Revenue increased 2.4% compared to the first quarter of last year, primarily due to growth in average monthly rates. Our overall rate increased 2.0% with positive contribution coming from all property types.

Our topline growth was offset by a decline in occupancy. Overall occupancy declined 40 basis points to 85.5%. The majority of this decline was driven by skilled nursing as well as a more challenging flu season compared to last year.

On a positive note, movement activity for all of 2015 has been robust. Scott will discuss our occupancy and move-in activity in more detail in a moment, but suffice to say increasing occupancy and continuing to drive rate across all of our communities remain our top priorities.

EBITDA adjusted for non-recurring items was $9.6 million and EBITDAR grew a healthy 14% quarter-over-quarter to $59.3 million. In 2015 we expect continued expansion in recurring EBIDTA and EBITDAR, as our marketing programs continue to gain traction, we maintain good cost control, and reap the benefits of acquisitions, expansions, and renovation projects.

At March 31, the percentage of private pay revenues was 77.3%, an increase of 60 basis points compared to the first quarter of 2014. Part of our success in driving this percentage higher is through the disposition program we embarked on more than a year ago. To date, we have sold 8 communities, the majority of which are skilled nursing facilities, and we expect to sell the remaining 4 facilities in 2015.

Before I close I briefly want to talk about a change in our quarterly press release. As part of our ongoing review of the information we provide to investors we included additional supplemental information in today's press release, which breaks out revenue and operating expenses in more detail in an effort to make it easier for investors to understand our business.

The first quarter marked continued improvement in our financial results and significant progress on our growth initiatives. We remain focused on the core fundamentals of our business, including executing results-driven sales and marketing programs, improving occupancy, driving rate, controlling costs, as well as integrating new communities. We expect all these levers to result in continued expansion in recurring EBIDTA and EBITDAR throughout 2015.

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

Thank you Bruce. I'll start off with a review of the first quarter occupancy results and provide a quarter-over-quarter comparison for each portfolio.

For the first quarter of 2015 total senior living occupancy declined 40 basis points to 85.5%. Occupancy at our owned independent assisted living communities increased 50 basis points to 87. 9%. Independent assisted living occupancy at our leased communities decreased 60 basis points to 88.0%.

Total CCRC occupancy was unchanged at 83.8%. Our managed occupancy decreased 80 basis points to 88.0%. Finally, our skilled nursing facilities reported occupancy of 78.6%, down 180 basis points and caused the biggest drag on our overall occupancy.

As I mentioned on our last call, the effects of the flu more negatively impacted our occupancy during the first quarter of 2015 compared to a year ago. While we achieved better move-in activity during the quarter, which was up 5% year-over-year, it was not enough to offset the move outs, which were up 9% year-over-year, and primarily due to the need for a higher level of care and increased mortality rates, which were up 17% year-over-year.

The move-out trends we experienced during the first quarter were seasonally typical and in line with what others in the senior living industry have been reporting. As of Friday, total senior living occupancy was 85.1%. We are still experiencing some marginal residual effects of the flu season but continue to be optimistic with the year-to-date move-in activity.

Turning now to rates, overall senior living average monthly rates increased 2% year-over-year in the first quarter. Looking at each portfolio, first quarter average monthly rates increased 3.8% at our owned senior living communities, increased 2.2% at our leased senior living communities, increased 1.1% at our CCRCs, and increased 3.9% at our skilled nursing facilities. We had meaningful success in pushing rates this past quarter and expect this trend to continue throughout 2015.

Now I would like to discuss some of our key sales and marketing initiatives that are driving move-ins. Late in the first quarter, we rolled out our new signature wellness and resident engagement program at all of our communities, that we have branded Lifestyle 360. In a nutshell, Lifestyle 360 is a research-based wellness program aimed at creating more meaningful and fulfilling activities for our residents that improve their intellectual, social, emotional, spiritual, and physical well-being.

Each activity has been thoroughly researched to ensure there is evidence to prove that the activity has a positive outcome for the residents. Based on one of these 5 areas of wellness, every Five Star community will offer at least one activity or event per day. Given the success of our celebrity chef program, Lifestyle 360 is yet another branded and packaged program that is resonating well with our residents and increasing their overall satisfaction, which typically leads to increased referrals.

Speaking of resident referrals, as I discussed on previous calls, our resident referrals are our very best lead source, as they convert at 25%, have the highest length of stay, and have the lowest cost of sale. To that end I'm pleased to report that our resident referrals were up 13% and resident referral move-ins were up a robust 31% year-over-year. Today, resident referrals account for nearly 25% of our total business, up from 20% a year ago and reflective of our overall resident satisfaction. In addition, regardless of the lead source, these programs give our sales force another tool to differentiate ourselves from the competition, demonstrate our dedication to the wellness of our residents, and ultimately create and convert more leads.

Turning to a quick update surrounding our digital investments. I'm pleased to report that we are beginning to reap the benefits of our new website, which features improved search engine optimization and the start of live-chat functionality. Our website move-ins were up 9% in the first quarter compared to last year and now account for 12% of our total move-ins. Our goal is to move this number even higher in the ensuing quarters.

Finally, we've initiated a new search engine marketing program and pay-per-click campaigns in 100 markets and have generated 1,200 incremental leads so far. We expect continued improvement in the coming quarters as our web presence and SEO strengthens over time.

Finally, I'm excited to share that Five Star's celebrity chef program was recently awarded the Best of the Best award by Alpha for its innovative culinary program. Our partnership with Chef Brad was the first of its kind in the senior living industry, and we are not only honored to receive this recognition, but also pleased that these programs continue to bear fruit for Five Star.

I will now turn the call over to Paul.

Thank you Scott, and thank you for joining us today. As Bruce mentioned, our first quarter results were impacted by inadequate documentation and other issues at one of our leased skilled nursing facilities, discovered as a result of our periodic review of medical records undertaken to test our compliance with applicable Medicare billing rules, pursuant to our compliance program.

This resulted in a reduction of $2.4 million of senior living revenue in EBITDAR specifically within our skilled nursing results. In addition, there was $2.3 million of incurred expenses that are in our Senior Living Other Operating Expenses in our skilled nursing results. During my prepared remarks today, I will exclude these items from my discussions and analysis as they are one-time and nonrecurring in nature.

For the first quarter, senior living revenues increased comparatively by 2.1% to $277.6 million, from $271.8 million in the first quarter of 2014. Management fee revenues were $2.5 million for the first quarter, an increase of 4% compared to the first quarter of 2014, primarily due to the increase in the number of communities we manage, which increased from 44 to 46. We are pleased that our management fee revenue continues to grow as we are now operating 60 communities that will generate approximately $11 million annually of management fee revenues.

Senior living wages and benefits for the quarter were $133.3 million, which is 48% of comparative senior living revenues, the improvement of 90 basis points from the first quarter of 2014. We experienced improvements in virtually all areas of wages and benefits. Employee health insurance costs have returned to average levels versus the higher cost experienced last year.

Other senior living operating expenses were 25.2%, a decrease of 160 basis points in the first quarter of 2014, primarily due to decreased costs associated with the winter conditions of 2015 versus 2014, and reduced bad debt expense.

The Company continues to experience good results from its focus on reducing its bad debt exposure. General and administrative expenses were $18 million for the quarter, a decrease of 9% compared to the first quarter of 2014. The 9% decline is primarily due to a decrease in audit fees which were incurred a year ago in connection with our risk statement and delayed filings. We are pleased that our auditing fees have returned to normalized levels and are estimated to be less than $1 million annually.

G&A costs for the first quarter were 5% of total revenues including our 46 managed properties. Rent expense for the quarter was $49.6 million, or 17.9% of comparative senior living revenues. It continues to decrease as we acquire properties on our balance sheet. In Q1 it decreased by 20 basis points versus the first quarter of 2014.

Interest expense was $1.4 million and depreciation and amortization was $8.1 million for the quarter. EBITDA, excluding nonrecurring items was $9.6 million for the quarter compared to $2.7 million, or more than 3x recurring EBIDTA in the first quarter of 2014, and is in line with the more normal run rate for Five Star. Recurring EBITDAR was $59.3 million for the quarter, an increase of 14% compared to the first quarter of last year. We expect continued expansion in recurring EBIDTA and EBITDAR through the year.

I will now review our liquidity, cash flows, and selected balance sheets items. Cash flows from operating activities were $16 million for the first quarter of 2015. We invested $11.6 million of capital into our communities and sold $4.1 million of long-term capital improvements.

At quarter-end we had $27 million of cash and cash equivalent. At quarter-end we had $354.9 million of net property and equipment, which includes 31 properties directly owned by Five Star, 11 of which are unencumbered by debt.

At quarter-end we had $30 million outstanding on our two credit facilities and $50.7 million of mortgage notes payable. We've given notice of our intent to repay the outstanding mortgage balance of $5.7 million that had 8.99% interest rate on one of our communities. We are currently at $30 million outstanding out of our total availability of $175 million.

In April, we extended our $150 million facility for one year. At the end of the quarter, our leverage was 26 percent of book value and 15% of assets. We believe we are in compliance with all material terms of our credit, note, and mortgage agreements.

In summary, we are pleased with our first quarter financial results and our growth initiatives thus far, with the addition of 15 managed communities and the acquisition of 2 communities on our own balance sheet which we expect to close during the second quarter.

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

Thank you.

(Operator Instructions).

One moment please for the first question.

We'll go to the line of Brian Tanquilet with Jefferies.

Good afternoon, congratulations.

Good afternoon.

So first question for you guys, just on the occupancy, how should we think about the general seasonality that you see in your business, especially given, that as of last Friday, it seems like we saw occupancy pull back down a little more. Just want to hear your thoughts on that.

Sure. You know, Q1 is typically a tougher quarter, and then, you know, it does build back up throughout the year. I think this year, what we are seeing and some of the other operators have seen is that it is dragging a little bit more into Q2, and again that should bounce back. The flu season for us this year for us was pretty tough, definitely tougher than last year, probably not as tough as it was two years ago but again tougher than last year.

You guys have done a great job with margins, up sequentially, up year over year. Is there more that you can squeeze out of it as we look through the rest of the year?

Obviously there is always, quote -- more, [laughter] but from the standpoint of providing any specific guidance it's kind of hard and I'll say premature. But I think one of the things that we're experiencing is that as we take on more senior living communities, good example, the 14 communities we just picked up in May, we do increase our leverage, whether it's buying food, you know, spreading our management oversight -- so again I do think that with volume comes additional leverage and opportunities to find more savings.

But also on a dollar basis, I mean, we saw G&A for example decline sequentially, by a pretty good margin or a decent amount. And other operating expenses did the same thing. So are we, should we think of this as the bottom in terms of the expense line on a dollar basis? Or is there more that you can squeeze out of that?

Using G&A as an example, one of the big drivers is the accounting and auditing statement costs. We're back to normalized levels of just shy of $1 million a year versus last year, full year, was almost $5 million. You know, I think as the Company continues to grow, using G&A as an example, I think full year last year, we ran probably about 4.8% all-in G&A, we're at 5% at Q1 and we expect to probably see a little bit more savings as we continue to go through the year. And I think the other areas the Company's done a nice job with, is -- some of it's benefits and risk costs, so whether it's professional liability or Workers' Comp, again, we actively manage it and we feel that, you know, we do well and certainly the industry as we compare ourselves to others, we do well.

We are always looking, Brian, every rock.

Last question, so Medicare is starting their bundled payment program. Obviously, the [sniff], spend, and the post acute size is one of the areas that the participants are looking at as sort of low-hanging fruit. So I just wanted to hear what you guys are doing, or if you are doing anything to participate in that indirectly, you know, whether it's contracting with some of the big convenors or the big physician practice groups that are involved in this program.

We're not doing anything too significant. In certain markets we are looking at some of that. As it starts to become more of a practice throughout the industry, we'll certainly be a player in it.

Got it. Thank you.

Thank you.

Next, we go to the line of Dan Bernstein with Stifel Nicolaus. Go ahead.

Good afternoon. This is Elizabeth Moran in for Dan.

Hi, Elizabeth.

Hi. First just a housekeeping item. What is the break down of IL versus AL versus skilled nursing units? Or is that perhaps in your new disclosure that I didn't quite see yet?

I don't know if we break that out in the release. We do break that detail out in the Q and the K. Unfortunately I don't have that with me. But if you look in the details, we do break that out in the Q and the K, like I said.

All right. That would be helpful. Was there any significant geographical variation in terms of the occupancy losses?

No, it was really spread throughout, in all honesty. I think, again, some of the other operators have said - are pretty much saying the same thing. We saw it really throughout the whole portfolio.

Okay. And then just some color on the two independent living communities that you are acquiring, maybe occupancy, if there is going to be any CapEx needs you anticipate, and then rate and time to maturity on the associated mortgage?

On the mortgage? I'm sorry, I didn't hear that question on the mortgage.

The rate and time to maturity, any details that you can provide on that mortgage.

For the mortgage that we're repaying, again, I'm not hearing your question.

Oh, the -- on the two independent living communities that you are acquiring, there is an associated $17 million mortgage, on that, right?

Oh, oh, I'm sorry. Yes. The rate on that is, I believe, 6.5% to 6.75%. They typically come with yield maintenance. So even though that rate itself is not a great rate, our ability to pre-pay is sometimes limited. Athough I mentioned in the call today, we did give notice of repaying just under $6 million as the pre-payment penalty burned off here in March.

And there is still significant term on that mortgage as well. So it won't be prepaid any time soon.

And then the properties themselves, the occupancy or -- do you estimate any significant CapEx on those.

No. The property is in good shape overall and occupancy is high. I don't know overall portfolio, so -- They are well-run communities.

All right. Great. And one final one. For the CCRCs, considering occupancy is running around 84%, assuming some of that vacancy is coming from IL, have you thought of perhaps doing some unit conversions up to a higher level of care?

The biggest opportunity in the CCRCs is actually coming from skilled nursing. That's where we have got a lot of our rehab to home programs going on, that we have talked about on past calls. Where it does make sense, if we do have a high number of IL units that have vacancy, we've looked at that and we've done that in the past and will do so in the future. So we would probably look to do some of that --

But it's not on the radar.

But again, I think the biggest opportunity there is skilled nursing.

All right, great. Well that's all from us. Thank you.

Great, thank you.

Thank you. And there are no further questions in the queue at this time. Please continue.

Great, well, thank you all for joining us on today's call, we look forward to updating you on future calls as well as the Jefferies Health Care Conference in New York in early June. Good afternoon, bye.

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