Alerislife Inc (ALR) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Five Star Senior Living fourth-quarter financial results conference call. (Operator Instructions). Please also note that today's event is being recorded. At this time I'd like to turn the conference over to Mr. Brad Shepherd, Director of Investor Relations. Sir, you may begin.

Thank you. Welcome to Five Star Senior Living's call covering the fourth-quarter 2016 results. The agenda for today's called includes a presentation by Bruce Mackey, President and CEO; Rick Doyle, CFO and Treasurer; and Scott Herzig, Chief Operating Officer. Following this presentation, the management team will open the floor to a question-and-answer session.

I would like to note that transcription, recording and retransmission of today's conference call is strictly prohibited without the prior written consent of Five Star.

Today's conference 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, Friday, March 3, 2017.

The Company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements made in today's conference call other than through our filings with the 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.

Thanks, Brad. And thanks, everyone, for joining us on our fourth-quarter earnings call. I would like to start off by announcing that we have officially changed our Company name to Five Star Senior Living from Five Star Quality Care. The name change represents Five Star's focus on not just providing the highest quality healthcare but also providing exemplary hospitality, amenities and personalized services dedicated to maximizing the independence and enhancing the lifestyle of our residents.

In 2001 we started the Company with a focus on clinical care and have evolved it into the full-service healthcare, hospitality and lifestyle provider that it is today. This evolution for our residents comes with industry-leading wellness, social and cultural programs and services. Our new name helps bring alignment to our evolved brand.

Another significant achievement of note is our entering into a new $100 million secured revolving credit facility replacing our previous facility that was scheduled to mature in April 2017. Rick will talk more about the specifics of the agreement later, but we are happy to have completed the deal, further solidifying our conservative balance sheet.

Before I get into the operations for the fourth quarter I'd like to quickly comment on the tender offer. In November ABP Trust, an entity owned by one of our managing directors, made a significant equity investment in Five Star through a tender offer. ABP Trust believed that the common stock represented an attractive investment and both they and our independent directors felt that the ownership stake acquired further aligning incentives of the Board member and those of Five Star. ABP Trust is now a 37% shareholder of Five Star's common shares and those shares are locked up for 10 years.

Turning now to the fourth-quarter operations, despite seeing a historically high number of new units coming online across the country in the quarter, our occupancy remains stable, we increased average monthly rates and continue to limit our exposure to government payers. This quarter's operations were highlighted by the addition of five new communities to our managed portfolio and the additions of two new communities to our leased portfolio.

Last quarter I announced six initiatives we designed to improve occupancy and cash flow from our senior living communities. I'd like to reiterate those initiatives as our team will be giving quarterly updates on our progress.

The list of initiatives includes: internal expansion and external acquisitions; improving our current communities through capital investment; revenue-generating initiatives which complement our existing senior living operations; utilization of expense efficiencies; investment in human capital; and continuing to create industry-leading programs and improving resident satisfaction.

All these initiatives will strengthen our business not only in the current oversupply operating environment, but also well into the future. Rick, Scott and I will update you on the quarter's execution of each throughout this call.

Total consolidated senior living revenue was down this quarter approximately $2 million or 0.8% compared to the same quarter last year. We had a solid 20% increase in our ancillary revenue, which includes our rehab and wellness business, but this was offset by a 1.1% decrease in our independent, assisted and skilled nursing revenues.

On the expense side, labor and benefit costs increased approximately 1.8% compared to the same quarter last year, which is excellent considering the wage pressures we are seeing in some markets.

Controllable operating expenses were down 1.6% compared to the prior year after adjusting for a litigation charge we incurred in the fourth quarter of 2015. This decrease is very encouraging and shows that our initiative to utilize cost efficiencies has been a success with more savings to come. Rick will talk more about our labor and operating expense controls later on.

On the strategic side of the business, in December we started managing five senior living communities Senior Housing Properties Trust, or SNH, owns with approximately 395 living units. These five communities are 100% private pay and they are located in Georgia where we have a strong geographic presence. Georgia is now our sixth largest state as far as unit concentration.

These communities fit seamlessly into our portfolio and will benefit from being part of our regional presence in that market as well as from our national contracts. These five communities should generate approximately $1.2 million of additional annual management fee revenues going forward.

Also in December we commenced operating and leasing two communities SNH acquired in Illinois comprised of a combined 126 living units at a 7.5% lease rate. These communities are 100% private pay and were added to one of our existing master leases with SNH.

Prior to the addition of these communities, we operated nine communities with a total of approximately 900 units in the state. Much like the managed community additions, these communities fit seamlessly into our operations network. EBITDA from these communities is expected to be approximately $150,000 annually. We also see additional opportunity for our ancillary businesses to benefit from both of these managed and leased additions.

On the capital deployment side of the business, as we've talked about in the past, a renovation initiative of ours called Rehab to Home converts existing skilled nursing beds in our CCRCs to high-end private rehab suites. We are targeting younger Medicare eligible patients for shorter rehabilitation stays. Our modern units with amenities, coupled with our food and concierge like services, makes us a preferred provider in the markets where we have these units.

We completed our most recent Rehab to Home project in South Carolina in the fourth quarter. We have three other projects well underway in Indiana, Ohio and Arizona. Our Indiana project should open by the end of March and the other two will likely open up in the second quarter of 2017. We also recently approved an additional project in Delaware and we expect construction to begin on that project in the third quarter of 2017. Since the launch of this initiative we have opened 125 units in five communities.

On the expansion front, last year we opened three expansions located in three states and these expansions are for the most part stabilized. In the second quarter of 2017, we will be breaking ground on larger projects in Delaware and Tennessee. In Delaware we will be constructing a 32 unit memory care community located on a leased CCRC campus.

In Tennessee we will be constructing a 91 unit independent living community which will be located next to an existing owned assisted living and memory care community. We are also looking at two projects in California which would add 72 units of memory care at two communities. One is a leased CCRC community and one is a community that we manage.

We will continue to evaluate other expansion projects at existing communities as we look for ways to take advantage of market opportunities and find growth internally. I would now like to turn the call over to Scott Herzig, Five Star's Chief Operating Officer, to talk about operations.

Thank you, Bruce. Total occupancy for the fourth quarter at our owned and leased senior living communities was 83.9%, up slightly from 83.8% sequentially and down from 85.0% year over year. Occupancy at our managed communities was 86.6% in the fourth quarter.

October and November move-in numbers were solid, but in December we began to see impacts from the flu and normal seasonal slowdowns. However, even with the slowdown in December move-ins, we were able to improve occupancy by 10 basis points over the third quarter. As of today we have more than 100 of our communities posting occupancy at 90% or greater and more than 60 communities with occupancy at 95% or greater.

In the fourth quarter we have continued our approach to reduce reliance on third-party lead aggregators and focus on driving people to our own website in addition to capitalizing on happy, satisfied existing residents with their direct referrals of friends and family.

In fact, move-ins from our existing resident referrals continues to be our best source of new move-ins, as does our own Company website where our content rich Five Star website now accounts for nearly 17% of move-ins, up 29% year over year.

Conversely, move-ins from A Place for Mom are down to less than 5% of our total move-ins, which is down 47% from a year ago. As we have seen in previous quarters, and similar to what others have been publicly reporting, our occupancy has been and continues to be impacted by new construction and newly completed units coming online in most all of our markets.

Out of our 23,000 owned and leased units NIC MAP tracks the supply data in the markets where 76% of those units are located. In analyzing the NIC new supply data from the fourth quarter, we found that 26% of our tract units have projected new senior living units opening up within a five mile radius in 2017. This is comparable to the 24% we reported last quarter. We think this number is it representative of our entire portfolio as we are seeing similar activity in the markets NIC does not track.

Growing occupancy remains a top priority for us and, as Bruce mentioned, we have been implementing and executing on our initiatives designed to do just that. We have said many times that senior living is and continues to be a local program driven business and, with that in mind, 2016 provided many opportunities for our five-star communities to showcase their new initiatives and new programs to help drive occupancy and resident satisfaction.

One of our best reviewed programs for 2016 was the point of sale program that focuses on resident choice and providing exceptional dining experiences. Having the ability to dine in a full-service coffee bar, sports pub or fine dining restaurant of your choosing has been a big differentiator for us where we have rolled this program out. And has positively impacted occupancy in those particular communities.

Our goal in 2017 is to add more of our communities to this program, continuing our focus on being an innovator and driving resident satisfaction throughout 2017.

One of the ways we are staying competitive in the skilled nursing environment is through the utilization of electronic medical records. Being electronic with our medical records allows us to more easily share our outcomes with referral sources, improves communications with physicians, reduces medication and transcription errors, and is key to participation in all of the organized healthcare programs.

Our extremely detailed and well thought out plan for implementation of the PointClickCare product is well underway after a successful pilot at nine of our communities in 2016 and we will look to have it all implemented by December of this year.

Another initiative that we have successfully executed upon in 2016 is our focus on increasing our investment in human capital and, more specifically, improving our bench strength in our executive director position.

Our Five Star branded Rising Star program identifies outstanding individuals looking to become difference makers in senior living operations and provides them with an intensive training program designed to develop them into successful executive directors. We currently have six exceptional individuals enrolled in the program and will look to continue to move more folks through the process on an ongoing basis at approximately every six month intervals.

And when it comes to growing revenue, especially in this challenging competitive environment, we continue to find other ways to contribute to the Company's bottom line. In particular our rehab and wellness business continues to expand. We now operate 77 outpatient rehab clinics, adding 15 new clinics in 2016.

Annual outpatient revenues grew to more than $18 million in 2016, an improvement of 17% over 2015. Our goal for 2017 will be to add 15 additional clinics and, for the first time, we will look to expand our outpatient rehab services into non-Five Star affiliated communities.

In this highly competitive environment we will remain laser focused on improving occupancy in 2017 and we will continue to be steadfast in demonstrating why a Five Star community is different and better than the competition.

I am confident that our approach to driving bottom-line results will be successful over the long-term. I will now turn the call over to Rick Doyle, our Chief Financial Officer.

Thanks, Scott, and good morning, everyone. For the fourth quarter 2016, our senior living revenues were $279 million compared to $281 million for the same period in 2015. The decrease primarily relates to the overall occupancy partially offset by an increase in our ancillary services revenue and increases in private pay rates.

Our management fee revenues were $3.4 million for the fourth quarter, an increase of 22% compared to the same period last year. This increase is due in part to the renegotiation of management fees with SNH for 17 properties effective June 2016 and the addition of eight new managed communities in 2016.

Senior living wages and benefits for the quarter were $137 million or 49% of senior living revenues. This represents a 1.8% increase compared to the same period in 2015 and demonstrates that our wages and benefits are well controlled.

As Bruce mentioned, we are seeing wage pressures in some markets. While senior living employees are not typically minimum-wage workers, state-mandated minimum wage increases affect labor costs overall. Combine this with the added challenge of keeping quality talent in-house and away from new competitors, we feel our team has done a tremendous job at keeping these expenses in check. Five Star has long-standing processes and systems in place to monitor labor and overtime and our team will continue to use these to help control costs.

Other senior living operating expenses for the quarter were $72 million, or 26% of senior living revenues. This represents a decrease of approximately $1.2 million or 1.6% compared to the same period in 2015 after adjusting the 2015 period for the litigation settlement expense. The decrease is due to our strategy to control operating costs across the entire portfolio. This strategy includes implementing companywide brand standards to leverage our scale and reduce costs while maintaining or increasing quality.

For an example, we recently entered into an agreement with Procter & Gamble for our laundry program which allows us to drive further savings and assess standards across other categories within the operating systems. In 2017 we will also look to straighten out national contract partnerships through consolidation of our cable TV and Internet programs amongst other initiatives that will help us further drive operating costs down.

General and administrative expenses were $19.3 million for the quarter, an increase of 7% compared to the same period last year. The increase is primarily due to increases in certain purchased services and professional fees and in line with our expectations for the fourth quarter 2016. Including all revenue from communities we own, lease and manage G&A was 5.2% of these revenues.

Rent expense for the quarter was $51 million, or 18%, of senior living revenues, an increase of 40 basis points of senior living revenues compared to the same period last year. The increase relates to seven additional leases we added to our portfolio from the June 2016 sale and lease back transaction with SNH as well as additional rent related to capital improvements we sold to SNH since 2015.

Interest expense for the fourth quarter was $955,000, a decrease of 28% compared to the same period last year. The decrease is a result of the repayment of our outstanding borrowings under our prior credit facility partially offset by the assumption of a mortgage note in connection with our acquisition of two senior living communities during the fourth quarter of 2015.

We reported a loss from continuing operations of $0.12 per share compared to a loss from continuing operations of $0.13 per share for the same period in 2015. Adjusted EBITDA was $3.5 million in the fourth quarter and included approximately $750,000 of evacuation costs from Hurricane Matthew that impacted certain communities in Florida, Georgia and South Carolina. Excluding these hurricane costs, our adjusted EBITDA would have been flat from the third quarter to the fourth quarter 2016.

Turning now to our liquidity cash flows and selected balance sheet items, at December 31 we had $16 million of cash and cash equivalents. On February 24 we entered into a new $100 million secured revolving credit facility that matures in February 2020 with our option to extend the maturity date for two one-year periods.

This credit facility requires interest to be paid on outstanding borrowings at LIBOR plus a premium of 250 basis points. This facility is secured by 10 of our owned senior living communities with a combined 1,219 living units with a total appraised value of approximately $212 million.

We also own an additional 10 unencumbered communities with a combined 856 living units in another six communities that are encumbered by mortgages with a combined 628 living units. The carrying value of these mortgages is approximately $50 million with a weighted average annual interest rate of 6.3% in a weighted average term of seven years.

As of December 31, 2016, our federal net operating loss carryforwards were proximately $72 million and our tax credit carryforwards were approximately $21 million. Cash flows used in operating activities were approximately $[15] million for the fourth quarter 2016. We invested $50 million of capital into our communities and sold $6.3 million of long-term capital improvements.

Our leverage was 26.9% of total booked capital and 11.8% of total assets. We believe that we are in compliance with all material terms of our credit facility and mortgage agreements. With that I will turn the call back to Bruce for closing remarks.

Thanks, Rick. 2016 was obviously a difficult year for our industry and for Five Star. Competition will continue to be fierce from new communities heading into 2017 as well. However, Five Star has an excellent foundation on which to grow over the coming years.

Our balance sheet remains strong and will be a source of growth for us in the near term. We continue to invest in our communities and I'm confident that our people and customer programming will give us a competitive edge in the coming years. I will now turn it back over to our operator for questions.

(Operator Instructions). Brian Tanquilut, Jefferies.

Hey guys, it's Jason Plagman on for Brian. First question, given the commentary on supply growth, how are you thinking about occupancy throughout the course of 2017 as well as any -- if that could place any pressure on your ability to raise rents?

Sure, Jason. So I think what the NIC MAP is projecting is flat 2017. I think we will probably be in that range as well. We were stabilized between Q3 and Q4 which is positive. We are putting some rates into place already through January and February on existing in place residents in the 2% to 3% range. That is happening, so it really hasn't been too much of an impact on our rate structure going forward.

And obviously we've got a lot of programs that we talked about in the call to help drive occupancy. We think we think we have got a lot going on. There is still going to be new competition coming online that's going to definitely be a little bit of a headwind for us. But again, I think hopefully we have somewhat bottomed out here.

And on the new move-ins, I mean are you seeing competition impacting -- causing you to increase discounting or how are you approaching that in 2017?

We're definitely having some issues in certain markets with discounting and pricing going on. I think we talked about before that we've initiated a program that lets us be more nimble with our pricing in certain markets and we are definitely taking advantage of those. But it's not any different than what we've been talking about the last couple quarters.

And then on the -- wage inflation obviously is a big topic in the industry. Are you targeting a certain level of same community wage inflation this year? Should we be thinking 2% to 3% or -- some people are even throwing out there 4% to 5% in some cases. Where do you think you fall in that range?

No, I think 4% to 5% is pretty aggressive. Obviously we did a pretty good job in 2016. I think 2017 is going to be a little bit more of a challenge, but is it 50 basis points more? Yes, perhaps. We had about five states that were impacted by minimum wages in 2016. That number more than doubles in 2017. But again, the vast majority of our staff are at or above minimum wage already, so it's going to be an impact but it's not in that 4% to 5% range.

Okay, thanks guys.

(Operator Instructions). Joe France, Cantor Fitzgerald.

Good morning, Bruce. Thank you. I just have a couple of questions. One is you had stable occupancy obviously sequentially, but a meaningful decline in adjusted EBITDA. Could you explain how that happens and how it reverses course going forward?

Sure. Big thing, so if we are talking about sequential EBITDA, we were pretty flat quarter over quarter. So when we had our -- really Rick talked about the prepared remarks, talking about the Hurricane Matthew costs that were about $750,000 that we incurred that obviously we don't expect to happen on a continual basis. That took place in October in the fourth quarter. So when you back those costs out we were really flat to Q3 overall. Does that make sense, Joe?

Yes, absolutely. I obviously missed that part of Scott's remarks. I apologize for that. The revolver, doubling it in size obviously makes an important statement. But equally important, does this herald a pickup in acquisition development activity?

Joe, this is Rick and our revolver, our new revolver is about $100 million, which is the same amount we had in our previous revolver. Today we have nothing outstanding. We will be using it to continue to straighten our balance sheet and that could be on adding acquisitions to our balance sheet.

And in terms of the expansions, we opened up about 70 units in 2016. Just with the timing and construction it's likely that we won't open any new units in 2017, but that will all happen in 2018 with the additions that we are going to start in Q2.

Obviously there is a supply concern out there that has been talked about, but I think what we are doing is a little bit different. We are adding on units to existing Five Star communities that have a strong track record, have high occupancies and we can really leverage what is existing at that current community.

So we feel pretty good about the plan, what we have done so far in 2016. Again, it has filled up nicely for us and we think it is a good initiative for our use of capital.

That's great. Thank you very much.

Ladies and gentlemen, at this time, showing no additional questions -- we do have a follow-up question from Brian Tanquilut, Jefferies.

So on the cash flow discussion, how should we -- operating cash flow was a little below what we were expecting for Q4. Anything you would like to call out that impacted cash flow in Q4? And then just how are you thinking about operating cash flow for 2017?

At the end of the year we had a pretty large amount of reimbursement, so timing of those reimbursements didn't happen until the first week of January. So you don't see that on the cash flow in the fourth quarter. I think you will see that be in line with the third quarter cash flows going forward in the first quarter of 2017.

Okay and (multiple speakers)?

(Multiple speakers) reimbursements.

Yes. Are you able to provide the magnitude of what moved into January?

Yes, it was around $10 million that was timing reimbursements.

Okay, that's helpful. Thank you.

At this time and showing no additional questions I would like to turn the conference call back over to Bruce Mackey for any closing remarks.

Great. Well, thank you very much. I want to thank everyone for joining us on our year-end earnings call and we look forward to updating you on future progress. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your line.