Alerislife Inc (ALR) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Five Star Senior Living Second Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Brad Shepherd, Director of Investor Relations. Sir, you may begin.

Thank you. Welcome to the Five Star Senior Living's call covering the second quarter 2017 results.

The agenda for today's call 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-answering 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, August 2, 2017.

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 the 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 on any forward-looking statements.

I will now turn the call over to Bruce.

Thanks, Brad. And thanks, everyone, for joining us on our Second Quarter Earnings Call.

In the second quarter, the senior living operating industry saw another record high in a number of new units opening up across the country. Consequently, we saw occupancy in our owned and leased portfolio drop to 83.1%, which is a 120 basis points lower than 1 year ago, and 50 basis points lower than last quarter, both of which correspond with the industry trends.

Despite the decline in occupancy in the second quarter, we were able to increase monthly rates year-over-year and increase our ancillary business revenue producing flat senior living revenue year-over-year.

We continue to limit our exposure to government reimbursed revenue sources, currently at just 22%, which is a positive in today's uncertain reimbursement rate environment.

In July, we announced an expansion initiative in the rebranding of our Rehab & Wellness division. This expansion is a result of our recognition of the changing needs of our seniors and the growing desire for relocation services within senior living communities.

We realized that many senior living communities are lacking this sought after amenity. With our experienced staff, national footprint and scalable platform, we can easily expand our relocation services outside of our own communities.

While we're still in the early stages of expansion, we are excited to offer our superior services in this niche market to more seniors across the country.

Our Rehab & Wellness division now operates under the name of Ageility Physical Therapy Solutions, and has signed agreements to service 4 communities outside of Five Star so far in 2017.

Moving to our capital deployment activity in the second quarter. We've spent approximately $20 million in CapEx this quarter, which is up slightly from last quarter for a year-to-date total of $38 million.

On an annualized basis, this would trend about 38% higher than last year's total CapEx spend of $55 million.

As has been the trend for the past 3 quarters, our largest dollar amount invested in the quarter was at our leased CCRCs, where we spent $9 million or 44% of our total CapEx for the quarter.

One of the larger initiatives, and thus, a large piece of the capital investment in our CCRCs is the Rehab to Home program that we introduced last year and continue to talk about.

We have recently completed a project at our Meadowood Campus in Bloomington, Indiana. This community now has one of the nicest, short-term rehab units in the area. The unit actually had a grand opening last week which was very well attended by referral sources.

We also completed a unit in the Scottsdale, Arizona, market and are awaiting the state to approve our license to operate.

We expect to complete a project in Ohio in the third quarter as well, and are lining up additional projects that we will kick off in the second half of 2017. Since the launch of this initiative, we have opened almost 150 short-term private rehab units in 7 communities.

Moving on to some of our other larger capital improvements. In Texas, last year, we started to convert 40 units of independent living to assisted living. This project is moving along and we expect to complete it in the second half of 2017. When finished, this will be one of the nicer assisted living units within a CCRC in the Dallas market. All these units will contain state-of-the-art amenities and the units will be larger than most of the assisted living units at our competition.

Looking at our owned portfolio now. In Indiana, we are close to finishing a conversion of 5 communities with 450 independent living units to assisted living units. We expect 2 to be wrapped up in the third quarter and the last 3 will be completed in the fourth quarter.

These communities, which have lost market share over the years due to the growing need of assisted living in the area, will now be better able to complete in their respective markets given the changing demand over the past several years.

We also announced last week the completion of a multimillion dollar renovation of a TRS CCRC in Arlington Heights, Illinois. We are wrapping up another renovation of a TRS CCRC in the Fort Myers, Florida, market and an independent living TRS community in Dallas, Texas.

We continue to evaluate expansion projects to take advantage of opportunities in certain markets and find growth internally.

In the remainder of 2017, we expect to break ground on expansion projects at 4 communities; 1 in Delaware, 1 in Tennessee, and 2 in California. In total, we expect to add 104 units of Memory Care and 91 units of independent living.

Although we haven't broken ground yet on our independent living addition in Tennessee, we have already collected deposits for over 1/3 of the rooms being built.

We're also looking at other expansion projects which would add assisted living and Memory Care at 2 additional communities.

We've been investing capital into our communities and will continue to do so to ensure that they will be able to compete with all the new inventory that's coming online in most of our markets.

We know in this challenging market that new demand isn't just going to walk through the door. We are not going to be complacent as we wait for the market to improve. We will continue to invest in our communities and keep our focus on ensuring that we are providing the best possible service we can to our residents. This will be the difference maker for Five Star in the long term.

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. As Bruce mentioned earlier, the second quarter proved to be a challenge with regards to growing occupancy, as we continue to see new units come online in many of our markets.

Total occupancy of the second quarter at our owned and leased communities was down 50 basis points sequentially and down 120 basis points from a year ago.

On the plus side, we continued the trend from last quarter where we were able to move in more new residents each month in the same time period last year.

Year-to-date, we have moved in 5% more residents than last year on a same-store basis, and we moved in 175 more residents in the second quarter of this year compared to the second quarter of last year, up 7%.

Unfortunately, our attrition exceeded move-ins and were impacted by the lingering effects of the flu, which was similar to Q1.

Our ongoing revenue management efforts allowed us to compete better with the influx of new competition with only a minor impact to our daily rate which was down slightly sequentially this quarter.

We were also pleased to see that resident referrals continues to be our #1 referral source, as this is a clear indicator of a high level of resident satisfaction.

While growing occupancy remains our #1 priority, our clinical excellence was showcased at many of our locations across the country in the second quarter, specifically as it relates to 15 of our communities being recognized by the American Health Care Association with Bronze Award for Quality, and an additional 3 more locations recognized with the prestigious Silver Award for Quality. We now operate 62 locations honored with the Bronze Award and 10 others that have been recognized with the Silver Award.

In addition to these prestigious awards for quality, I am also proud to report that for the first time, more than 80% of our skilled nursing units are rated as 3 stars or above by the centers for Medicare and Medicaid Services, or CMS, which is a key qualifier for participation with most managed care and accountable care organizations.

It also strengthens our ability to create strategic partnerships with individual hospital systems. We are very proud of all these communities and congratulate them for their prestigious accomplishment.

Turning now to our Rehab & Wellness division. As Bruce mentioned earlier, we have rebranded this division, and it is now called Ageility Physical Therapy Solutions. While accounting for just 2% of our gross revenues, this division produced $5.6 million in ancillary revenues for the second quarter, which is up 12.3% from the prior year.

We opened 4 new outpatient rehab clinics during the second quarter, bringing our total number of outpatient clinics to 85.

As I mentioned on our last call, our goal in 2017 was to expand our outpatient rehab expertise outside of the Five Star footprint. And to that end, I am pleased to announce that we have signed 4 new non-Five Star contracts for outpatient rehabilitation services; 2 of these contracts are in Florida, 1 is in Arizona, and 1 is in Nevada, all of which fall into our geographic areas where we already have an outpatient presence. 2 of these clinics are already up and operating, and the other 2 should be opened during the third quarter. We are pleased with the pace of our expansion for the Ageility division, and will continue to look to add new business, both inside and outside the Five Star space, over the ensuing quarters.

Before I turn the call over to Rick, I would like to provide a couple of other updates on 2 of the larger initiatives we have ongoing in 2017: our Electronic Medical Records Conversion project and our Rising Star Program.

With regards to our Electronic Medical Records Initiative, we are on schedule and continue to convert all of our skilled nursing units at our CCRCs and our freestanding skilled facilities to the PointClickCare product. As a reminder, being electronic with our medical records allows us to more easily share our outcomes with key referral sources, improves communications with physicians, reduces medication and transcription errors, and is vital to participation in all of the organized healthcare programs.

Our plan is to be fully electronic with our medical records in all of our CCRCs and freestanding skilled nursing communities by the end of 2017. I will keep you updated on our progress on subsequent earnings calls.

Last quarter, we also talked about our program to cultivate new Executive Directors at the community level, branded as our Rising Star Program. Executive Directors are the difference makers in operating a successful building, and we currently have 6 outstanding individuals going through the program, a couple of whom are ready to sit for their state exam.

We are currently in the process of hiring another 6 to take their place in the training curriculum, and have had a tremendous amount of interest in being chosen for this training. In fact, we have had more than 1,000 applicants, both internal and external, apply for this tremendous opportunity.

We are pleased with our progress in building bench strength in this pivotal position and will continue to introduce new individuals regularly.

Every day, our operations team focuses on initiatives designed to strengthen and improve our business. Equally as important as everything I just mentioned, we continue to create industry-leading programs and improve resident satisfaction which arguably makes Five Star the best senior living operator in the industry.

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

Thanks, Scott, and good morning, everyone.

For the second quarter 2017, our senior living revenue of $279 million was flat compared to the same period in 2016, primarily due to the increase of 1.2% in our average monthly rates in our leasing of 2 additional communities in the fourth quarter of 2016, offset by the decrease in occupancy of 120 basis points year-over-year.

Our management fee revenue was $3.6 million for the second quarter, an increase of 26% compared to the same quarter last year. This increase is due to the 6 new managed communities we now operate in the increase in the base management fee at certain of our managed communities since July 1, 2016.

Senior living wages and benefits for the quarter were $135 million or 48.3% of senior living revenue. This was a 1% percent or a $1.2 million decrease, compared to the same period in 2016.

Although salaries increased 2% year-over-year, we experienced a decrease in our health insurance and workers compensation insurance programs.

Other senior living operating expenses for the quarter were $75 million or 26.7% of senior living revenue. This is an increase of approximately $2.7 million compared to the same period in 2016.

The increase was due to the implementation of our Electronic Medical Records Initiative, which we expensed approximately $800,000 in the second quarter. We expect to incur similar costs in the third and fourth quarters of 2017, as we complete the implementation.

We also recorded a $500,000 benefit in the second quarter of 2016, related to the final settlement at one of our skilled nursing facilities, creating an unfavorable comparison year-over-year.

And finally, we continue to keep our communities marketable, we have incurred higher repairs and maintenance expense in the second quarter compared to the same period in 2016.

General and administrative expenses were at $19 million for the second quarter, an increase of approximately 10% compared to the same period last year. Included in G&A is $500,000 of costs related to the implementation of our new ERP system.

Rent expense for the quarter was $52 million, an increase of 2.8% compared to the same period last year, and 18% of our senior living revenue. The increase primarily relates to our leasing of 9 additional communities since July 2016, as well as the additional rent related to capital improvements made to our leased communities since July, 2016.

Interest expense for the second quarter was $1.1 million, a decrease of 28% compared to the same period last year, due to the decreased borrowings under our credit facility.

In the second quarter of 2017, we recognized a benefit from income taxes of $1.4 million due to monetizing alternative minimum tax credits. We report a loss from continuing operations of $0.13 per share compared to a loss from continuing operations of $0.16 per share for the same period in 2016.

Adjusted EBITDA for the second quarter was -- 2017 was $3 million.

Turning now to our liquidity, cash flows and selected balance sheet items. At June 30, we had $7.2 million of cash and cash equivalents and no borrowings outstanding on our $100 million revolving credit facility. The credit facility is secured by 10 of our owned senior living communities.

At quarter-end, we had $351 million of net property and equipment, which includes 26 communities directly owned by Five Star, 6 of which are incumbent by mortgage debt. The carrying value of these mortgages is approximately $59 million with a weighted average annual interest rate of 6.3% and a weighted average term of 6 years.

Our leverage was 28% of total book capital and 12% 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. While we're encouraged with the absorption year-to-date, the consistent influx of new inventory is exceedingly discouraging. Rest assured, we are not taking a decline in occupancy and the corresponding decline in our share price lightly.

Operationally, we concentrate on our 6 profitable initiatives each and every day and battle to turn the downward trend.

On the public equity side, we faced challenges almost as daunting as our operational hurdle. As our equity market cap had fallen below the $100 million mark, the size of the pool for potential investors has reduced with it due to liquidity constraints. However, we continue to get out to the market and tell our story to investors.

Our balance sheet remains strong. We are investing in and positioning our properties to remain competitive and our programming, services, and most importantly, our people, are among the best the industry has to offer.

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

(Operator Instructions) Our first question today comes from Brian Tanquilut from Jefferies.

Jason Plagman on for Brian. So first question, your rent growth slowed a little bit this quarter, about 1% versus 2% to 3% in Q1. Can you just talk about the trends that you're seeing in pricing and discounting? And how you see that -- your outlook for the second half as far as pricing growth?

Sure. This is Bruce. So we saw probably a little bit more discounting in the second quarter than in the first quarter and I think it helped on our move-in side, as Scott said, our move-ins quarter-over-quarter were up, which is a positive. But it's a tough market with all the new units coming online, we've got to be competitive. More of our communities are utilizing our dynamic pricing program. So we are being selective with rates. And I think you'll probably see that continue a little bit in Q3 and Q4 in all honesty.

Okay, that's helpful. As then as far as the monthly progression throughout the quarter, can you just -- did you see the usual seasonal uptick in occupancy or improvements in -- later in Q2? And even if you can comment into June and July on what you saw as far as occupancy.

Sure. This is Scott. We -- I talked about it in the script but we did have a good 6 months. Our move-in numbers were relatively strong when you compare them to last year. We definitely have seasonality. It's built-in there we are able to overcome a lot of that. We did have some issues with the flu that spilled into the second quarter. But we were aggressive with our move-ins, with our pricing and we were happy with what we saw in the first 6 months of the year. July, July has a little seasonality built into it in the Florida, Arizona, and some in Texas. It wasn't quite as strong as the previous 6 months, but we still had some decent numbers.

And if you look back historically too, we definitely pick up in August and September, those have been really good move-in months for us, so.

Okay, that's helpful. And as far as just the CCRC segment, occupancy was particularly weaker than the other groups. Any factors that you'd call out there that affected that segment?

Yes. Mostly on the CCRC side, you saw a decline on the skilled side of the house. It's not unusual given what we've seen over the last couple of years with the skilled occupancy. We typically don't have very much at all in the way of Medicaid in our CCRCs, skill side of the house. So our numbers are a little bit tougher to compare it to, but we definitely had some drops in our Medicare eligible residents over the last quarter.

And I think if you look at our program and what we've done on that side with the Rehab to Home, on that end our putting in electronical medical records, boosting our affiliations with ACO. So again, we're trying to get out there and capture that market space.

And then just following up on the Rehab to Home initiative. You're a year or 2 into that program now. Can you talk about some of the details -- provide some details on the improvement you've seen in occupancy or rent growth from some of those projects that have been completed.

Well, this is Scott. So on the Rehab to Home, our goal there is to go after a higher and shorter term rehab resident. So every place that we put those units into place, we've seen an increase with our client base, our target audience there, our lengths of stays are much shorter when we use those, but our reimbursement is -- we definitely hit some higher RUG levels and when we install those units because of the type of patients we're able to get. So they've been successful for us. If we didn't upgrade and put in those beautiful suites that we have in place, we would be so far behind the eight ball on the skilled side of the house. So they have definitely helped us be competitive. Especially, when you consider that many people in the CCRC side of the business come into our communities knowing that they at some point will be in the skilled side of the house. So they're great marketing tools as well.

And in 2 of those communities too, we actually took out Medicaid units and replaced them with Medicare patients. And the rate per day difference on those 2 are pretty significant.

And again, that's why we keep talking about the Electronic Medical Records. That too will help us compete and to get part of the managed care organizations that are taking a lot of the traditional Part A residence right now.

Yes, I think long-term, you'll probably see a lot of the sniff -- traditional sniff units to some extent go away. And I think the units that are -- we're positioning right now for Rehab to Home as you look in the future of this industry, are really going to be competitive going forward.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Great. Thank you, Jamie. I'd like to thank everyone for joining us on our second quarter earnings call and we look forward to updating you on our progress on future calls. Thank you.

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