Alerislife Inc (ALR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Five Star Senior Living's Fourth Quarter 2017 Financial 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. Please go ahead.

Thank you. Welcome to Five Star Senior Living's call covering the Fourth Quarter and Full Year 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-answer session.

I would like to note that the transcription, recording and re-transmission 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, March 21, 2018. 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 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.

Thanks, Brad, and thanks, everyone, for joining us on our fourth quarter and year-end 2017 earnings call. Before we begin our prepared remarks, I would like to take a minute to say we are deeply saddened by the recent unexpected passing of Barry Portnoy, our Founder and one of our managing directors. We extend our sincerest condolences to Barry's family and friends. Barry was truly an amazing individual and set high standards for all of us here at Five Star. I worked with Barry for over 20 years, and he was a great mentor to me during that time. His leadership and vision will be missed.

Yesterday, Adam Portnoy was elected to serve as Managing Director of Five Star. I have worked with Adam for 15 years, and I'm confident in his ability to help lead Five Star into the future.

Now turning to our operational results for the quarter. Adjusted EBITDA for the fourth quarter 2017 was $2.1 million, down from $3.5 million for the same period last year. This is the result of senior living revenues down 30 basis points and total expenses up 30 basis points after adjusting for both nonrecurring compliance assessment costs. Our total expenses would have been down quarter-over-quarter if not for certain insurance-related expenses, which Rick will discuss in more detail later.

On the private pay side of the business, we saw a 30 basis point increase in independent living, assisted living and Memory Care revenues in the fourth quarter of 2017 compared to the same period last year. This was driven by independent living and assisted living revenues, which were up over 1% as we were able to mitigate decreases in occupancy with increases in rates in these lines of businesses.

Memory Care was a portion of the private pay business where we were not able to overcome occupancy loss with increased rates as this has been the fiercest source of competition over the past year. Memory Care revenues were down 3% in the fourth quarter compared to the same quarter last year because 50% of our Memory Care Units had new Memory Care Units open up within 5 miles over the past year, according to the NIC data.

On the government reimbursement side of the business, we saw a $2.7 million decrease in skilled nursing revenue, with the majority of that coming from our leased stand-alone skilled nursing communities. Occupancy at our leased skilled nursing facilities was down 220 basis points from the fourth quarter of 2016 to 78%. As we've discussed in the past, government reimbursement rates continue to be under pressure resulting in lower margins. Efforts led by accountable care organizations and managed care programs are resulting in decreased length of stay, lower reimbursement rates and, in many cases, are requiring people to bypass a stay at the skilled nursing facility and go home for care as a lower-cost alternative.

Our stand-alone leased skilled nursing communities are still profitable for us and continue to cover rent by over 2x. We continue to apply strategies to mitigate our shrinking margins, including implementation of electronic medical records, which Scott will talk about more in a bit.

On last quarter's earnings call, we announced that in the fourth quarter, we have entered into a sale/manage-back agreement with Senior Housing Properties Trust to sell 6 senior living communities for an aggregate sales price of approximately $104 million. As of December 31, we had sold 2 of the 6 properties for approximately $39 million. Two properties closed subsequent to quarter-end for approximately $42 million, leaving 2 properties left which we expect to close during the second quarter.

The completion of this sale gives us access to capital by realizing a portion of our own portfolio's value and further reduces our long-term mortgage debt balance. We intend to use the proceeds from the sale/manage-back transaction for general business purposes, including future capital investments in our remaining leased and owned communities.

Last year, I announced several initiatives designed to improve occupancy and cash flow from our senior living communities. The list of initiatives includes: growth through internal expansions; 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.

These initiatives have strengthened our business through this current oversupply operating environment and will continue to do so well into the future.

We made some good headway in a lot of areas during 2017, and Rick, Scott and I will update you on the execution of each throughout this call.

I want to start off by talking about capital investments and expansion opportunities. We spent approximately $16 million in capital expenditures in the fourth quarter and $71 million in 2017. Approximately 56% of the CapEx spent in the fourth quarter and in 2017 was funded by our landlord, Senior Housing, for use at our leased properties. Our rent expense will increase approximately $3.2 million as a result of these capital sales to Senior Housing in accordance with our lease terms.

While that may put a bit of pressure on coverage in the near term, the underwritten EBITDA growth we expect to generate as a result of these capital improvements will largely exceed the rent increase.

The largest project we currently have ongoing in our leased portfolio is at our CCRC in Dallas, Texas called The Forum at Park Lane. Here, we are converting over 40 units of independent living apartments into assisted living units. These units are currently out of service and have been since the middle of 2016. When completed, which is expected in the second quarter of this year, these units will be among some of the nicest assisted living units in the Dallas market. After the conversion is complete, we plan to create a Memory Care Unit within this community that will allow us to care for some of our existing residents as opposed to them leaving us for a higher level of care.

We continue to move forward on our other expansion projects to take advantage of opportunities in certain markets and find growth internally. We are awaiting final approvals to begin construction of 2 Memory Care Units at 2 of our leased CCRC communities. We will be adding 48 units of Memory Care in a California CCRC and 32 units at a CCRC located in Delaware. We are also awaiting final approval to begin construction of 22 units of Memory Care at a managed assisted living community in California. And lastly, we've begun construction of a 91-unit independent living community that is in Tennessee that we will manage. We expect this community to be complete in the middle of 2019. And as of last week, the units were almost 40% pre-leased.

On the larger initiatives, and thus, a large piece of the capital investment at our CCRCs is the Rehab to Home program that we introduced last year and continue to talk about. Last quarter, we completed a project at a managed community in the Scottsdale, Arizona market. We have seen our Medicare census increase from an average of 17 residents per day prior to the project completion to just over 20 residents per day after the project completion.

Another Rehab to Home project we completed before this was at a leased CCRC in Bloomington, Indiana, and we have seen very similar results. We achieved these gains in spite of an extremely difficult skilled operating environment right now. These are prime examples of how the Rehab to Home program is intended to work. We're awaiting for the state to issue our license to operate at our latest Rehab to Home project at a leased community in the Columbus, Ohio market. When opened, we expect to see a similar result. We are starting work on another Rehab to Home project at a leased CCRC in the Delaware market as well. We expect this project to be completed at the end of 2018. We will continue to evaluate other skilled units where this initiative makes sense.

Looking at our own portfolio now, in Indiana, we finished converting 5 communities with 450 independent living units to assisted living units in Q3 of 2017. We are still waiting on the state to approve our license to operate as assisted living, which we expect will happen in the second quarter. Once they are approved, these communities will be better able to compete in their respective markets given the change in demand over the past several years.

We have 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 we have seen and expect to see in 2018. As we've said in the past, we are not going to be complacent as we wait for the senior living industry dynamics to improve. We're going to position our communities to better compete in their respective markets now and be able to take advantage of the foreseeable increase in demand in the future.

To that extent, the sale/manage-back transaction provides us with the capital to help maintain our flexibility as we move forward into 2018.

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 was 82.6% in the fourth quarter, down 40 basis points sequentially and down 130 basis points year-over-year. Not unexpectedly, move-in activity slowed in the latter part of the fourth quarter due to normal seasonality and some early impact of the flu. However, total move-ins for the fourth quarter were still up 1% compared to the fourth quarter of 2016. Additionally our total move-ins for all of 2017 outpaced 2016 by nearly 2% despite the continued impact of new construction, which is still negatively impacting our communities.

Our ability to quickly and effectively revenue-manage many of our communities, combined with our increased dominance of the digital space, were the main drivers for this year's year-over-year improvement with move-ins. In fact, move-ins directly from our Five Star website were up 14% year-over-year and now account for 22% of our total move-ins. However, unlike in the third quarter where we benefited from positive attrition rates related to move-ins and move-outs, the fourth quarter discharges outpaced move-ins due to higher rates of mortality and higher levels of care.

The senior living industry continues to battle against the growing number of options available to seniors, including staying in their homes as opposed to living in our communities. Combine that with lower length of stay caused by the increasing average age of new residents and their increased level of frailty, and you have 2 additional occupancy barriers to overcome, accompanied by new supply. This fact only further emphasizes the importance of our focus on driving new customers to our communities by showcasing why a Five Star community is different and superior to the competition.

Looking at move-in activity for the first 2 months of this year, January was a good month for us and February was even better. Overall, we are slightly ahead of last year's pace despite the challenge of having more than 40 of our communities closed to admissions at some point during this period because of the flu. This compares to only a handful of communities closed to admissions in the fourth quarter of 2017. Our aggressive approach to quarantining and treating illnesses related to the flu have been successful. And at this time, we only have a couple of our communities unable to admit.

Turning now to our Ageility Physical Therapy division. We continue to be pleased with the performance and growth of this division. Revenues for the fourth quarter were $8.2 million, a 16% increase over the fourth quarter of 2016. For the year ended 2017, revenues for Ageility were approximately $31 million, which was up $3.4 million compared to 2016.

We opened a total of 15 clinics in 2017, 6 of which are not affiliated with the Five Star community. As of today, we operate 102 outpatient clinics, 8 of which are not affiliated with the Five Star community. In 2018, we would like to slightly outpace this year's total of adding both Five Star outpatient clinics and non-Five Star outpatient clinics to our existing platform.

And now to an update on our electronic medical records initiative. Earlier in 2017, we began a rather significant project to convert all of our skilled nursing units to electronic medical records platform, and I am pleased to report that we have now completed the conversion of all of our freestanding and CCRC skilled nursing units.

With Phase 1 of our conversion project complete, we will now proceed to Phase 2, which will involve conversion of our assisted living units to an electronic medical records platform beginning with those units in our CCRC environment. 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 health care programs.

Moving on to a couple of updates related to our higher-profile company initiatives, the MyChoice Resident Dining Program and our company-branded Rising Star Program. We are now fully operational with the MyChoice Dining program at 7 of our large independent living and CCRC communities, 6 of which are managed and 1 that is leased. These communities now offer multiple dining venues at each site, ranging from coffee and espresso bistros to sports pubs and fine dining restaurants, utilizing a point-of-sale system similar to what you would find in any public restaurant or café.

Feedback has been extremely positive, and our marketing and research shows that this dining program is a difference maker to prospective new residents and had directly correlated to occupancy improvements where it has been put in place. We will continue to add communities to this program throughout the course of 2018 and beyond.

In response to the ongoing shortage of qualified executive directors the senior living industry is experiencing, Five Star initiated our industry-leading executive director in training program back in late 2016, which we call our Rising Star Program. Since that time, we have identified quality new leaders, both inside and outside of Five Star, provided them with one-of-a-kind focused and detailed training on how to successfully operate a Five Star community and placed those graduates in existing Five Star communities as executive directors.

Since initiation of this program, we've enrolled 13 participants, 4 of whom have graduated and are currently working successfully as executive directors in a Five Star community. The remaining 9 participants are in various stages of their training, which will continue throughout the remainder of the year. We are very pleased with the progress of this program and the candidates we graduate, and we will continue hiring more Rising Star students throughout 2018.

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

Thanks, Scott. Good morning, everyone. For the fourth quarter 2017, our senior living revenue of $279 million decreased $1.7 million or 60 basis points compared to the same period in 2016. Approximately half of the decrease was a result of a revenue reserve that we recorded during the quarter. The remainder of that revenue decrease is a result of the decline in occupancy, offset by both an increase in our average monthly rates and an increase in revenue from our Ageility Physical Therapy division.

Our managed fee revenue was $3.5 million for the fourth quarter, an increase of 4.5% compared to the same quarter last year. This increase is due to the 5 additional managed communities we now operate compared to the same period in 2016.

Senior living wages and benefits for the quarter were $138 million or 49.4% of Senior Living revenue. This is over a $700,000 decrease compared to the same period last year.

Drilling down a bit deeper, labor was up only 1% as compared to the fourth quarter 2016, offset by a decrease in benefits to close to 6%. This nominal increase in labor costs demonstrates that they remain well controlled as we adjust the use of our staff to accommodate for fluctuations in occupancy. The decrease in benefits is due to a decrease in our health insurance and workers' compensation insurance programs, from less claims compared to the same fourth quarter of last year.

Other senior living operating expenses for the quarter were $74 million or 26.6% of senior living revenue. This is an increase of approximately $2.3 million compared to the same period in 2016 and includes an increase of approximately $2.8 million in our professional and general liability insurance group expenses. This was offset by an overall decrease in our daily operating expenses where we have successfully controlled costs across the entire portfolio.

General and administrative expenses were $18.5 million in the fourth quarter, a decrease of approximately 4.2% compared to the same period last year. The decrease relates to lower corporate salaries and benefits, offset by an increase in consulting fees. The consulting fees were associated with both the new revenue recognition accounting rules and the implementation of our new ERP system, which went live on January 1, 2018. G&A as a percentage of all revenue from communities we own, lease and manage was 4.9%.

Rent expense for the quarter was $52 million, an increase of 2.3% compared to the same period last year and 18.6% of senior living revenues. The increase primarily relates to our leasing of 2 additional communities since December 2016, as well as rent increases from capital improvements that were sold back to our landlord at our leased communities.

We reported a loss from continuing operations of $0.02 per share compared to a loss from continuing operations of $0.12 per share for the same period in 2016. The loss from continuing operations includes an asset impairment charge of approximately $1.6 million to reduce the carrying value of the senior living communities classified as held for sale.

In the fourth quarter 2017, we recognized a benefit from income taxes of $3.2 million, primarily due to monetizing alternative minimum tax credits. The new tax law that was enacted on December 22, 2017 has minimal net impact to Five Star as we have federal net operating losses of approximately $91 million at the end of the year.

Now turning to our liquidity, cash flows and selected balance sheet items. At December 31, we had $26.3 million of cash and cash equivalents and nothing outstanding on our $100 million revolving credit facility, secured by 10 of our own senior living communities. At year-end, we had approximately $251 million of net property and equipment that included 20 communities we own and $59 million of net property and equipment classified as held for sale that included the 4 properties yet to close from the sale/manage-back transaction.

SNH agreed to assume approximately $34 million of mortgage debt in relation to 3 of the 6 communities to be sold. In December, January and February, we sold 4 of the 6 communities to SNH for approximately $81 million, and we expect to sell the remaining 2 communities for approximately $23 million with approximately $17 million of mortgage debt to be assumed as third-party approvals are received during the second quarter. After the transaction is complete, we will have 1 mortgage note remaining of $8.2 million with an interest rate of 6.2% due at September 2032 encumbering 1 of our senior living communities.

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

Thanks, Rick. As expected, 2017 was a challenging year for the senior living industry, and competition will continue to increase from new supply throughout 2018. Earlier in my prepared remarks, I recapped a list of initiatives that we introduced at the beginning of 2017. And throughout this call, we have demonstrated the tremendous progress we've made on each of them. However, we have much more work to do. And while these initiatives are aimed at increasing profitability, as I said many times before, we passionately believe that it's the fundamentals of the business that will determine our success.

We continually strive to make Five Star the operator of choice by providing outstanding quality care, coupled with best-in-class services. In 2017, our focus on the fundamentals, combined with our execution of strategic initiatives, have strengthened our company and we look forward to continued progress through adapting, improving and growing as the senior living industry evolves.

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

(Operator Instructions) It appears we have no questions. This concludes our question-and-answer session. I would like to turn the conference back over to Bruce MacKey for any closing remarks.

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

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