Alerislife Inc (ALR) 2015 Q3 法說會逐字稿

Good morning and welcome to the Five Star Quality Care third quarter financial results conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Tim Bonang, Senior Vice President. Please go ahead, sir.

Thank you, and good morning, everyone.

Joining me on today's cast 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, November 6, 2015.

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 or SEC 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, Tim. And thanks everyone for joining us on our third quarter call.

Our third quarter results were highlighted by a 44% year-over-year increase in adjusted EBITDA, which returns us to the more normalized $9 million plus range per quarter that we like to see, and also a 5.5% year-over-year increase in adjusted EBITDAR. Our stronger operating results were the result of increased private pay rates as well as solid expense controls.

Before I get into the details of our results, I do want to highlight that during the quarter we recorded a non-cash goodwill impairment charge of $25.3 million or $0.52 per basic and diluted share. As part of the preparation of our 2015 third quarter financial statements, we determined that, as a result of the significant decline in our stock price, subsequent to the announcement of our financial and operating results for the 2015 second quarter and the overall decline in values of other comparable publicly traded (inaudible)operating companies, potential indicators of impairment existed and a interim assessment of goodwill for impairment should be undertaken.

Upon completion of this interim assessment we recorded this non-cash charge for goodwill to reduce the carrying value of our goodwill to zero. I want to emphasize, again, that this impairment charge was a non-cash charge taken during the third quarter.

Now, looking at the results, loss from continuing operations for the third quarter of 2015 was $26.3 million or $0.54 per basic and diluted share. Without the effect of a non-cash goodwill impairment charge I just mentioned of $0.52 per basic and diluted share, Five Star report a third quarter loss from continuing operations of $0.02 per basic and diluted share.

This is a significant improvement have to second quarter loss from continuing operations of $0.07 per basic and diluted share as well as the third quarter 2014 loss from continuing operations of $0.05 per basic and diluted share. Third quarter revenue increased 0.8% primarily due to increases in average monthly rates to residents who pay privately for services, partially offset by decreases in occupancy.

Average monthly rate at owned and leased senior living communities increased 1.7% with positive contribution coming from all of our leased property types. Growing occupancy continues to be a challenge for the senior living industry. At Five Star occupancy in the third quarter at owned and leased senior living communities decreased by 110 basis points to 85% from 86.1% for the same period in 2014, however, we were down only 10 basis points in total from the second quarter of 2015 and we saw increases in our leased independent and assisted living communities as well as our skilled nursing facilities.

At September 30th, the percentage of private pay revenues was 78%, an increase of 30 basis points compared to the third quarter of 2014. Our focus on private pay acquisitions coupled with our continued execution on our strategic dispositions program has enabled us to drive this percentage higher over the years.

On the acquisition front, in November 2015 we acquired two private pay independent living communities with a combined total of 152 living units located in Tennessee for $26 million excluding closing costs. We funded this acquisition with cash on hand and by assuming $17.3 million of mortgage debt. Annual revenue is expected to be approximately $3.9 million with a healthy EBITDA contribution of approximately $2 million.

This acquisition fits our criteria of being private pay, located in a geographic area where we have a strong balance sheet and is accretive to earnings. We continue to make steady progress on our dispositions program as well.

In July and August 2015 Five Star and Senior Living Properties Trust or SNH sold two skilled nursing facilities located in (inaudible), Wisconsin with a combined total of 51 living units for approximately $1 million and as a result of these sales, Five Star's annual minimum rent payable to (inaudible) decreased by $100,000 in accordance with the terms of the applicable lease. To date we have sold 10 communities, the majority of which were skilled nursing facilities and expect to sell the remaining two facilities in the first quarter of 2016.

As of today, Five Star continues to market for sale one community it owns with 32 living units and Five Star and SNH (inaudible) for sale one community that Five Star leases from SNH with 116 living units, each of which are reported as held for sale and included are discontinued operations in Five Star's financial statements.

Now, turning to an update on our rehab to home and expansion projects. As you will recall rehab to home converts existing skilled nursing beds in our CCRCs to high end private rehab suites. We recently completed one project in Kentucky and are having an open house next week.

The other project we have underway in South Carolina got pushed back a bit and is now scheduled to open at the end of the first quarter in 2016. On the expansion front, we inherited two projects for an additional 38 units from the CNL communities we began to manage on May 1st. Both of these expansions came online in July and should provide additional management fee revenues. These projects are in fill up now, we have 3 other projects in process which I've mentioned on previous calls, which are expected to wrap up soon.

Additionally, construction was just completed at one expansion in Texas, and we are awaiting the certificate of occupancy. Pre-leasing activity at this expansion community has been strong. The other two projects are still on track at the start of 2016.

These three projects will add a total combined approximately seven units split between assisted living and memory care. We currently operate at high occupancies at these communities and as a result of our expansion investments, they will be better able to accommodate the market demand and drive EBITDAR at these communities. We are actively evaluating additional rehab to home and expansion opportunities throughout our portfolio and would expect to break ground on additional projects in the near term.

In summary, during the third quarter Five Star's solid expense controls, balance sheet strength and progress on construction initiatives led to much improved sequential and year-over-year performance. Moving to the end of 2015 and into 2016, we will rely on these areas of strength as we push to reach profitability through occupancy and rate increases and holding expenses steady.

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

Thank you, Bruce. I'll start off with a review of rates before turning to occupancy.

Overall senior living average monthly rates increased year-over-year in the third quarter, and looking at each portfolio, our private pay independent and assisted living provided the greatest contribution to rate growth as third quarter average monthly rates increased at our owned senior living communities by 3.6% and increased 2.5% at our leased senior living communities.

Our CCRCs experienced very modest rate growth of 0.2% and skilled nursing rates increased by 1.4%. We will continue to push rates throughout the remainder of 2015 and expect our overall rate increases to come in at our target of 2% to 3% for the year. Now turning to our third quarter occupancy results. I'll provide a comparison for each portfolio.

Year-over-year for the third quarter of 2015 total senior living occupancy declined 110 basis points to 85.0%. Although total occupancy was only down 10 basis points from the second quarter. Occupancy at our owned independent and assisted living communities declined 190 basis points to 86.3%. This was primarily related to a significant renovation project at one of our Indiana communities that has disrupted operations but should be completed in the fourth quarter.

Independent and assisted living occupancy at our leased communities decreased 170 basis points on a year-over-year basis to 87.8% but actually improved sequentially over the second quarter by 10 basis points. Total CCRC occupancy declined 40 basis points to 82.8%. Our managed occupancy decreased by 70 basis points to 87.5% and finally occupancy at our skilled nursing facilities was 79.3%, which was flat from last year. Total current occupancy is 85.0%.

Although move and activity continue to be robust, up 4% year-over-year in the third quarter, it was not enough to offset our move-outs. Mortality rates and move-outs due to a need for higher level of care were once again the biggest factors impacting occupancy. Even with the increased move-outs, we still saw plenty of movement activity for the quarter and were able to improve rates and avoid the level of discounting that some of our competitors have accepted.

Also as a result of the higher level of acuity, we saw our level of care revenue increase by 4% for the quarter over last year, and is an area we would most likely continue to see grow over the ensuing quarters. Growing occupancy continues to be a significant focus for the company. Over the last five weeks we have embarked upon our most aggressive sales campaign in company history.

During this time period we logged over 20,000 sales calls involving all levels of the organization, calling upon our top referral sources to enlighten them regarding our signature resident program, Lifestyle 360. This campaign just wrapped up, but already we have seen an increase in the number of leads from professional sources. And just by way of reminder, professional referrals are of significant importance to us as they convert at the highest rate, have one of the higher lengths of stay and have one of the lowest cost of sales.

We also continue to set the bar extremely high in our food and dining program with our ongoing relationship with celebrity Chef Brad Miller. Under Chef Brad's direct oversight we have now trained and certified over 110 of our community chefs in the Five Star culinary institute, which focuses on educating and training to deliver the best and most satisfying meals to our residents in the most energizing environments possible.

This program continues to highlight our focus on enhancing our residents food and dining experiences and continues to be a showcase of what we can do different and better than the competition, thus ultimately leading to higher occupancy.

On the clinical front I'm pleased to announce a large step forward in our push to become fully electronic with our medical records, as we have now fully implemented electronic medical records at our first Five Star community in Scottsdale, Arizona.

Electronic medical records have many documented benefits, not the least of which are continuity of care and the significant reduction in documentation errors. But it also creates efficiencies across all of our lines of business and improves our communication between hospitals and our physician groups.

Based on the successes at our Scottsdale community, we have plans to convert more communities in the first quarter of 2016 and will push to be fully electronic company-wide in the near future.

I will now turn the call over to Paul.

Thank you, Scott, and thank you for joining us today.

For the third quarter senior living revenues grew to $279.7 million, an increase of $2.3 million compared to the third quarter of 2014. Primarily the result of a 2.7% increase in private pay rates in our ILAO communities. Management fee revenues were $2.7 million for the third quarter, an increase of 11% compared to the third quarter of 2014, largely due to the increase in the number of communities we manage, which increased from 44 to 60.

We expect that our 2015 management fee revenue will be just under $11 million for the full year. Senior living wages and benefits for the quarter were $135.1 million or 48.3% of senior living revenues, a decrease of 50 basis points compared to the third quarter of 1204, which was 48.8%.

At 48.3% of senior living revenues, senior living wages and benefits were in line with our expectations and remain well controlled. Other senior living operating expenses were $72.6 million, which included $900,000 of legal consulting costs incurred related to the skilled nursing compliance matter of one of our communities.

When adjusted for that, they were at 25.6%, a decrease of 10 basis points from the third quarter of 2014. General and administrative expenses were $16.6 million for the quarter and were 4.5% of total revenues under management. This compares favorably to the prior year by 50 basis points. Primarily due to decreased expenses for accounting with statement costs, board costs, which occurred in the second quarter of 2015, and reduced legal expenses.

Rent expense for the quarter was $49.7 million or 17.8% of comparative senior living revenues and is the same percentage as last year during the third quarter. Interest expense was $1.1 million and depreciation and amortization was $8.4 million for the quarter. As Bruce previously discussed, the company recorded a non-cash goodwill impairment charge of $25.3 million in the quarter.

Adjusted EBITDA excluding nonrecurring items was $9.2 million for the quarter, a 44% increase over the third quarter of 2014. The increase was primarily due to the private pay rate increase and expense management.

Year-to-date adjusted EBITDA is $26 million an increase of 44% when compared to the prior year. Adjusted EBITDAR was $59 million for the quarter, an increase of 5.5% over the previous year and is $175 million for the first nine months of 2015, a 5.5% increase compared to last year. We have managed our margins and flow through capture well.

Now I'll review our liquidity, cash flow and selected balance sheet items. Cash flow from operating activities was $11.7 million for the third quarter of 2015. We invested $15.7 million capital into our communities and sold $7.5 million of long-term capital improvements. At quarter end we had $19.8 million of cash and cash equivalents.

We had $354.5 million of net property and equipment, which includes 31 properties directly owned by Five Star, 12 of which are unencumbered by debt. At quarter end we had $35 million outstanding on our two credit facilities and $42.9 million of long-term mortgage notes payable. We are currently at $35 million outstanding out of our total availability of $175 million.

At quarter end our leverage was 29% of book capital, and 16% of assets. We believe that we are in compliance with all material terms of our credit, note, and mortgage agreements.

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

(Operator Instructions). At this time we will pause momentarily to assemble our roster. And our first question will come from Brian Tanquilut from Jefferies. Please go ahead.

Hey, good morning, guys. Just a first question on occupancy, negative ten sequentially, just wanted to hear your thought on what the drivers are for the sequential weakness and also tying that into your views on industry, new construction in the industry.

We've heard a lot of noise about that. I just want to see if you thought that was impacting your occupancy or if there are other factors driving the sequential weakness.

You know, I don't think construction is playing a huge part rate now. You know it's possible at some point in the future, you know, obviously construction is up and it's going to impact at some point a little bit everybody, but construction we've seen over the years in a number of our markets come online and it's making sure that our buildings are in good capital shape to withstand that new construction.

You know, for the most part, you know, again, as Scott highlighted, the robust movement activity continued as we've seen throughout the entire year, we're up 4% year-over-year and it's the same story for our move-ins. We did see growth in our leased independent and assisted living occupancy. We saw a little bit of weakness in our owned independent and assisted living in terms of occupancy, and that was primarily one property that we saw a sizable decrease.

And that was because of a construction project that was going through the other pipeline that's been wrapped up. So I really can say construction isn't playing too much of a piece right in terms of our occupancy.

Okay. Got it. And then in terms of just trying to drive that up, you highlighted Lifestyle 360 and all these other initiatives. I mean, should we, I mean, based on what you're seeing today or your outlook for, you know, the next several quarters, how are you thinking about occupancy trends going forward given, just like you said, you're seeing robust movements?

You know, the NIC was up 20. We were down 10. But like I said, you know, we did track close to the NIC in some markets, not so well in other markets. I think overall we should be relatively close to what the NIC is going to do.

Okay. Got it. And then from a cost inflation perspective, I was just wondering if you guys are seeing any unusual or the start of accelerating cost inflation in your facilities.

No. From a cost standpoint, you know, we continue to manage margins well, but we also, as a function of increasing, you know, our size and leverage, continue to buy more efficiently, but just to throw out a couple of big statistics, you know, year-to-date, our wages and benefits are 20 basis points below last year's 2014.

You know, our food year-to-date and again we've been focusing very heavily on improving the foot delivery through our programming, food is up 1.5% so we're actually trending below, you know, the outside inflation and we're improving the level and quality of food. Utilities are flat, 0.3 of a point, and then I think if you, probably the best way to caption it is if you look at our other operating expenses, which are call it 25% to 26% of our P&L, year-to-date, you know, I took a basket of half of the big items and we're up 0.3 of a point.

So, again, we've been able to manage our costs well, and I think that we'll continue to find ways of finding opportunities to defend inflation. Certainly our pricing as evidenced by the results in Q3, our pricing, you know, our private pay portfolios have more, more than offset any cost increases.

Got it. And the, Paul, last question. Are there any nonrecurring items that need to be highlighted for this quarter? I know we had some in Q2 so I just wanted to make sure that there's nothing that we haven't discussed yet.

No. You know, we've outlined them on page seven of our press release and all of our operating expenses that are in Q3 are at the normalized range, so, again, a pretty quiet quarter from the standpoint of cost movement.

All right. Got it. Thank you.

Great. Thank you, Brian.

Our next question comes from Daniel Bernstein of Stifel. Please go ahead.

Good morning.

Good morning, Dan.

I just wanted to parse out the occupancy a little bit further. Are you able to give us numbers for occupancy of the portfolio if you excluded the properties where you have disruptive projects? I was just trying to, you know, was the bulk of the portfolio occupancy higher if you excluded those properties? I mean, if any specific detail (inaudible).

I can't put a number to it right now. And maybe that's something we can think about on future calls. But, sure, obviously there's something there. And I mentioned the project in our owned independent and assisted living community that was down significantly because of a project.

Also our CCRCs were down a little bit as well. And we probably had, I don't know, roughly 30 units in two properties that were offline during the quarter. So, yes, that does have a little bit to do with it.

Okay. Okay. Yeah. I think having a specific number excluding those disrupted properties would be very good and helpful. And then also, in terms of, go back to the competition question. Are you, you know, expanding any CapEx projects or accelerating CapEx projects based on competition you're seeing?

I'm just trying to understand if we're going to see some of the CapEx numbers pick up in the next year or two in response to, you know, again maybe not catastrophic supply but just an increase in supply and competition.

Yeah I don't think it will be huge always because, like I said, we've been dealing with new display coming online in a number of our markets, you know, every year as far back as we can see so it's always happening. You know, I know in Texas for example, Texas is a hot button, we have ramped up a CapEx project at one community but that's just one example out of 250 communities. I do think our expansion capital that I've talked about in my prepared remarks, we've got 70 units coming online that will be more of a driver of capital than kind of remodeling, if you will, to get ready for new construction.

Okay. On the expansion projects, are you able to quantify what you expect your IRRs and increases in revenue, EBITDAR or cash flow might be as a result of those projects, assuming they stabilize?

You know, it's going to be significant. I know in past investor relations presentations we've had slides on some of the projects that we've done in terms of additions, and, you know, they've usually been able to drive, I say this from a capital flow through, it's almost 50%, Paul, somewhere in that range, so the flow through on seven units, it's going to be pretty nice.

And keeping in mind that somewhere in the vicinity of 60% of the capital that we spend on the expansion front, we sell that capital, and then we, you know, we obviously pay increased rent and part of the analysis that we go through is we typically, when we pro forma out, we'll typically be getting three to four times the rent increase, if you will, in increased EBITDAR. So again, you know, the projects are very healthy from the standpoint of returns.

Okay so maybe that's the Rule of thumb to think about is, you know, the amount of CapEx times, I guess, it's what, an 8% rate I think you're paying?

Yes.

And then multiply that by three or four and that's probably the EBITDAR increase.

And that's fair.

Over a couple of quarters.

Yes.

You're right. Yes there's going to be some (inaudible). Yes.

Okay. And then, you know, you're also generating a pretty significant level of cash flow beyond that. You bought two properties, I think I saw, in November, which we think that's a very good strategy. You know, what else do you have in the pipeline in terms of acquisitions and, you know, how do you rank allocating money towards, say, additional expansions and CapEx versus acquisitions at this time?

Well, you know, you did mention that we've done a decent job of building the cash, you know, we look at capital allocation on a fairly regular basis. You know, right now we've got a fair amount of capital that can be allocated both towards remodeling as well as expansions.

The pipeline right now is a little lean, you know, with cap rates where they are right now, it's tougher for us to compete at this level, not to say we're not going to look but, again, that's probably not a huge part of the story in the next, you know, couple quarters.

Okay. That's real helpful color there. I think that's all for me. I'll hop off. Thank you.

Great. Thank you.

Thanks, Dan.

This concludes or question-and-answer session. I would like to turn the conference back over to Mr. Bruce Mackey for any closing remarks.

Great. Thank you. I want to thank you all for joining us in our third quarter earnings call and I'll look forward to updating you on our progress on future calls. Thank you.

Your conference is now concluded. Thank you for attending today's presentation. You may now disconnect.