Alerislife Inc (ALR) 2016 Q1 法說會逐字稿

Good morning and welcome to the Five Star Quality Care first-quarter 2016 results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Brad Shepherd, Director of Investor Relations.

Thank you. Welcome to Five Star Quality Care's call covering the first-quarter 2016 results. On today's call, you will hear from Bruce Mackey, President and CEO; Rick Doyle, Treasurer and CFO; as well as 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 like to note that the transcription, recording and retransmission of today's conference call is strictly prohibited without the prior written consent of Five Star.

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, Wednesday, May 4, 2016. The Company undertakes no obligation to revise or publically release the results of any revision to 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.

I will now turn the call over to Bruce.

Great. Thanks, Brad, and thanks, everyone, for joining us on our first-quarter earnings call.

In the quarter, once again, we were able to increase rates, hold the line on occupancy, and we kept good control on our operating expenses. We continue to push forward the programming and innovation that has led to higher resident satisfaction and will lead to higher levels of resident and professional referrals, which, in turn, should lead to higher occupancy. We have a very positive outlook on the long-term growth strategy that our Company began years ago and has made us one of the largest companies in the private pay senior living business today. We will look for ways to grow this Company through strategic acquisitions and capital investment in our existing communities, including expansions that make sense. We will also look for other business opportunities such as our outpatient, rehabilitation, and wellness business, where we can leverage our large portfolio of communities.

At March 31, the percentage of private pay revenues was 78.1%, an increase of 80 basis points compared to the first quarter of 2015. Our past 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. Since we began our strategic disposition program, we have sold numerous communities, the majority of which were skilled nursing facilities. In the first quarter, we closed an older, 159-unit skilled nursing facility located in Wisconsin that we leased from Senior Housing Properties Trust or SNH. Due to the advanced age of this facility, the physical plant required extensive capital to be competitive in its market. Ultimately, we deemed this expenditure imprudent. This facility lost approximately $425,000 before rent in 2015, and we expect the closure to have a positive financial impact to Five Star. We expect to sell this closed facility later this year.

Although we did not purchase any senior living communities in the first quarter, we continue to look at private pay communities within our geographic operational presence. Alternatively, we are focusing our capital on improving our existing senior living communities, as well as renovation and expansions. We have completed and are currently working on a few rehab to home and expansion projects of note. Our renovation initiative, rehab to home, converts existing skilled nursing beds in our CCRCs to high-end, private rehab suites. As we have stated in the past, we are targeting younger, Medicare eligible patients for shorter rehabilitation stays. Our modern units with amenities, coupled with our food and concierge-like services, make us a preferred provider in the markets where we had these units.

We are still making progress on our project in South Carolina, which we expect to wrap up in the next few months, and we have begun a new project in Indiana. We will start another rehab to home project in Arizona within the next month or two as well.

On the expansion front, in the first quarter, we opened up an 18-year expansion of an assisted living community in Texas. We are in fill up mode at that expansion now.

Also, late this week, we expect to begin taking new residents at a 16-unit expansion of an assisted living and memory care community located in Maryland, and we expect to open a 34-unit expansion at a community in Tennessee in the next month.

In addition, later this year, we expect to start construction of a 100-unit independent living community that will be located right next to an existing 88-unit assisted living and memory care community we operate in Tennessee.

We're also still exploring construction of a [Mericare] building that will be located next to a CCRC we operate in Delaware. Both of these large projects will likely take 18 or more months to complete.

We will continue to evaluate other expansion opportunities at existing opportunities as we continually look for ways to take advantage of market opportunities and find growth internally.

Additionally, we can continue to grow through our third-party management business. Subsequent to quarter end, in April and May, we entered into an agreement with SNH to manage two senior living communities with a combined 125 living units. We also expect to enter into a management agreement with SNH in the second quarter of 2016 for a senior living community located in Alabama, which has 163 living units. All of these communities are majority private pay and are located in areas where we have a strong geographic presence. These communities should generate approximately $250,000 of management fees annually to Five Star.

I would now like to turn the call over to Scott Herzig, Five Star's Chief Operating Officer.

Thank you, Bruce. Overall average monthly rates at our owned and leased senior living communities increased year over year in the first quarter by 0.7%. Looking at each portfolio individually, skilled nursing's average monthly rates increased the greatest at 2.1%, followed by our private pay independent assisted-living leased communities at 1.9% and our owned communities at an even 1%. Our CCRCs' average monthly rates decreased by less than 0.5%.

The decrease in rate in the CCRCs was a result of a couple of significant refurbishment projects that were ongoing during the quarter. As we have said in the past, we will continue to target a total of 2% to 3% for private pay rate growth in 2016. And, on a positive note, CMS has just announced a proposed 2.1% rate increase for skilled nursing, which should have a positive impact on our Medicare revenue going forward.

Turning now to occupancy, starting this quarter, in an effort to more accurately represent occupancy and better align our Company calculations with industry and peer practices, we adjusted the method we used in the calculation of these numbers. Our operations team completed a detailed review of our units, and we now no longer include any units considered out of service in our occupancy calculation.

In the first quarter, we took a net total of 316 units out of service. 75% of those units are attributed to two communities: a major renovation project at one of our owned CCRCs in Texas and the closure of a leased freestanding skilled nursing facility in Wisconsin that Bruce mentioned earlier.

With that said, total occupancy for the first quarter at our owned and leased senior living communities was 85.1%. The portfolio with the largest decrease in occupancy year over year was at our owned independent and assistant living assisted communities.

In that particular portfolio, we have a number of communities in the midst of converting units from independent living to assisted living in order to better compete in their particular markets. Occupancy at our managed properties was 87.3% in the first quarter.

As Bruce said earlier, growing occupancy continues to be a major focus for us here at Five Star, and just as important to us is ensuring that our occupancy growth comes from the right channels.

Move-in activity for January and February was slower than we have seen in years past, but March ended up producing a record number of move-ins across all portfolios. Our ongoing investment in our digital platform continues to provide excellent results. Move-ins from our own website continues to improve and now accounts for 16% of our total move-ins, which is up over 21% from last year and exceeded our expectations.

And, as we continued our efforts to capitalize on happy and satisfied residents, we were also pleased to see the results of our focus on securing new move-ins from referrals from our existing residents as those move-ins typically have the longest length of stay and has the lowest cost of sale.

Resident referrals now account for 26% of our total move-ins, which is up 11% from last year. While we have focused resources on our digital presence and on resident referrals, we are also continuing to push to reduce our reliance on third-party referrals from companies like A Place for Mom, as these referrals tend to be the most expensive to cultivate and have the shortest length of stay. In fact, our total move ins from third-party referral agencies is now at 8% of our total move ins, down from 16% last year. As we and others in the industry have reported, new supply continues to impact our occupancy numbers in certain markets. And, as a result, we have had to be more nimble with our ability to highlight and improve value to our customers.

With that in mind, I am pleased to report that we have initiated a community-centered dynamic pricing program, which looks at how inventory and market demand impact pricing. This initiative will allow us to look at our competitive landscape in essentially real-time and provide us the opportunity to flex rates up or down to capture demand. We currently have approximately 80 of our communities participating in the program at this time. We believe that we are ahead of most of our competitors in this regard, and we will continue to add more communities to this program over the ensuing months.

Before I turn the call over to Rick, I wanted to provide brief update on our rehab and wellness business. As of today, we currently operate outpatient rehab clinics at 67 of our communities across the portfolio. The benefits of these clinics are threefold. One, they provide an opportunity to improve length of stay by identifying, preventing, and treating certain declines in function and addressing them on-site as opposed to discharging out to an alternative setting for treatment. Two, it is a much sought after amenity for new and existing residents. And, three, this line of business is a profit center for us. We have opened five clinics so far this year and look to add another seven clinics by the end of 2016. I will continue to provide updates on this business on future calls.

I will now turn the call over to Rick Doyle, our Chief Financial Officer.

Thank you, Scott. Good morning, everyone. For the first-quarter 2016, our senior living revenues were $280 million, an increase of $4.9 million compared to the first quarter of 2015, primarily due to private rate increases of 1.6% at our IL and AL communities, as well as a $2.4 million revenue reserve we recorded in the 2015 period regarding a compliance assessment issue.

Our management fee revenues were at $2.8 million for the first quarter, an increase of 11% compared to the same period last year. The increase in these revenues are primarily due to an increase in the number of managed communities compared to the 2015 period and an increase in average monthly rates to private pay residents at our comparable communities.

Senior living wages and benefits for the quarter were $136 million or 48.5% of senior living revenues, an increase of 1.9% compared to the first quarter of 2015 and a 1.1% sequential increase to the fourth-quarter 2015.

At 48.5% of revenue, senior living wages and benefits were in line with our expectations and remain well-controlled. Other senior living expenses for the quarter -- for the first quarter were at $69.7 million or 24.9% of senior living revenues. This represents a 3.4% decrease from the first-quarter 2015. The decrease is primarily due to compliance costs of $2.3 million we recognized in the first part of 2015.

In addition, we have seen a reduction of 70 basis points in purchase services to 5.3% of revenues, a 30 basis point reduction in supplies to 3.2% of revenues, and another 40 basis points reduction in the utilities to 3.8% of revenues. This was all compared to the same period in 2015.

As evidenced in our first-quarter results, we are beginning to see progress on our supply chain strategy to move from regional purchases for key goods and services to national purchasing agreements with strategic partnerships such as waste removal, housekeeping, and laundry chemicals, as well as food and equipment purchases. This strategy allows us to implement systemwide branch standards that will enable our supply chain to leverage our scale and reduce costs while maintaining quality.

General and administrative expenses were $18 million for the quarter and were 4.9% of total revenues under management, comparatively flat to the prior period.

Rent expense for the quarter was $50 million or 17.9% of senior living revenues, an increase of 90 basis points for the same period last year. Interest expense for the first quarter was $1.5 million, and depreciation and amortization was $9.6 million.

We reported a loss from continuing operations of $0.05 per share compared to a loss of continuing operations of $0.10 per share for the same period in 2015. Adjusted EBITDA was $9.2 million for the quarter compared to $9.6 million for the same period last year.

During the first quarter, we experienced a loss of approximately $400,000 of earnings related to a frozen water pipe that burst at one of our CCRC communities in Kansas. This issue impacted approximately 40 units, requiring them to be out of service for the first half of the first quarter. Today these units are back in operations, and we are in fill up mode.

Adjusted EBITDA was $59.3 million for the quarter, a slight increase over the first quarter of 2015.

Now I will review our liquidity, cash flows and selected balance sheet items. Cash flows used in operating activities was $4.7 million for the first quarter of 2016. We invested $14.3 million of capital into our communities and sold $5.6 million of long-term capital improvements.

At the end of the quarter, we had $12.3 million of cash and cash equivalents and [$50] million outstanding on our $150 million credit facility and $60 million of long-term mortgage note payable. Today, we have $60 million outstanding on our credit facility, and subsequent to quarter end, we extended the maturity date of our $150 million secured revolving credit facility to April 2017.

We also decided not to extend or replace our former $25 million revolving secured line of credit that matured in March 2016.

At quarter end, we had $384 million of net property and equipment, which includes 33 properties directly owned by Five Star, 13 of which are unencumbered by debt. Our leverage was 40% of total book capital and 23% of debt to total assets. We believe that we are in compliance with all material terms of our credit note and mortgage mortgage agreements.

With that, I will turn the call back to Bruce for closing remarks.

Thanks, Rick. As you can see by the many initiatives that we have installed in every aspect of our business here at Five Star, we have made a strong commitment to drive internal growth. Whether it is investing in our existing communities, uncovering new business opportunities, strategically managing our pricing, or leveraging our scale, I believe it is evident that we are dedicated to improving the overall health of our business.

I will now turn it back to our operator for questions.

(Operator Instructions) Brian Tanquilut, Jefferies.

It is Jason Plagman on for Brian. First question, on -- the cash flow is a little bit -- operating cash flow was a little bit weaker than we were expecting. Were there any -- is there any additional items you would call out as far as impacting Q1?

And then, just what are your expectations for the rest of the year?

Hi, Jason. This is Rick Doyle. How are you doing? Yes, we have the litigation expense we had in the first quarter a little over $7 million that we have paid out on our -- one of the cases that was settled during the quarter, and we had some more AP expenses this quarter that were paid out that were accrued last quarter but paid out this quarter and in the first quarter. We don't expect that to continue in the second quarter going forward. So we do see our positive cash flows coming in in the second quarter and going forward in 2016.

Okay. That makes sense. And are you guys seeing any wage pressure in your markets? That has been a topic in the industry, so just wanted to get your thoughts on if you saw any of that in Q1 and if you are expecting it in the rest of the year.

Definitely nothing in Q1. It was pretty in line with expectations, and I think that is probably the same for the next few quarters. I think, as these states' minimum wage laws get enacted, like California and New York, and things like that, that will have somewhat of an impact, but that is down the road.

The good thing about having 80% of our revenues in the private pay business to some extent that we can pass it along to our customers, we will look to do that because everyone is going to be in the same boat to some extent. But, again, nothing that we really saw in the first quarter. And, again, it should be pretty stable, I think, for the few quarters in the future.

Okay. And then, you just mentioned the private pay and your ability to flex pricing. Any initial data you have got on your dynamic pricing or how you are thinking about the opportunity there or any metrics or magnitude that you can provide would be helpful?.

This is Scott. Nothing yet. We just rolled this out, but the idea here is that we took a page from the hotel industry and went out and hired a consultant from Starwood to help us build a program that allowed us to be more nimble with our pricing so we can maximize revenue. That gives us the ability to, like you said, move prices up or down.

It is a pretty dynamic program. We are looking to -- at all of our prices on a monthly basis now where we hadn't done that in the past. So it is still early, but the initial results are -- they are pretty positive as far as being able to move people in a little bit faster than we have in the past.

And I think you said you have -- you are using that in about 80 communities, and what is kind of the rollout for the remaining communities?

Yes. We have got 80 of our communities on right now and, really, those are concentrated in areas where we have seen an uptick in new supply or a little bit more uptick in demand.

In the next couple of quarters, we will start rolling more communities on to this, but right now we are concentrating on these 80 that we have on to really fine-tune the program.

And this concludes our question and answer session. I would like to turn the conference back over to Bruce Mackey for any closing remarks.

Great. I want to thank everyone for joining us on our first-quarter earnings call, and we look forward to updating you on our progress on future calls. Thank you.

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