Alerislife Inc (ALR) 2019 Q1 法說會逐字稿

Good morning, and welcome to the Five Star Senior Living First Quarter 2019 Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Five Star Senior Living's call covering the first quarter 2019 results. The agenda for today's call includes a presentation by Katie Potter, President and CEO; and Rick Doyle, Executive Vice President, CFO and Treasurer. Following this presentation, the management team will open the floor to a question-and-answer session with research analysts.

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 8, 2019.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC, regarding this reporting period.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

I will now turn the call over to Katie.

Thanks, Michael, and thanks, everyone, for joining us on our first quarter earnings call. I'd like to start the call off by discussing the restructuring with Senior Housing Properties Trust.

On April 1, 2019, we entered into a transaction agreement with SNH to modify our existing business arrangement, including terminating the leases for all senior living communities we leased from SNH and replacing those leases with new management agreements. The rent expense we incurred in 2018 from the leases to be terminated was over $206 million.

The management agreements for all senior living communities we currently manage on behalf of SNH will also be terminated and replaced with new management agreements.

After the termination of the existing leases and entry into new management agreements, our senior living operating portfolio will consist of 4 leased communities containing 204 units, for which we pay approximately $3 million in rent annually to HCP; 20 communities containing approximately 2,100 units that we own directly; and the remainder of the communities will be managed by Five Star on behalf of SNH. We expect to terminate the SNH leases and enter into the new management agreements on January 1, 2020.

In addition to terminating the SNH leases and entering into the new management agreements, we have executed several financial transactions with SNH designed to immediately improve our financial position and provide us with a source of liquidity.

First, fixed rent payments under our SNH leases have been reduced from $17.4 million to approximately $11 million per month effective February 1, 2019.

Second, when we entered into the transaction agreement, SNH purchased all the property, plant and equipment related to the SNH leased communities for approximately $50 million, the equivalent of those assets' depreciated book value. Any capital improvements made at the leased communities during the transition period, April 1 to January 1, 2020, will be funded by SNH directly.

Third, SNH provided us with a short-term $25 million credit facility secured by 6 of our owned communities. This credit facility will expire on January 1, 2020, unless extended, and is intended to provide us liquidity while we work to refinance, extend or replace our existing credit facility.

Finally, SNH will reduce our balance, if any, under the SNH credit facility, will assume certain of our liabilities associated with the converted communities and will make a cash payment to us upon entry into the new management agreements, all of which, in aggregate, will total $75 million.

In exchange for terminating the leases and the financial transactions I just outlined, Five Star will issue approximately 260 million shares to SNH and SNH shareholders to increase their combined ownership of Five Star to 85%. The issuance of these shares is subject to a shareholder vote, which will take place by the end of the summer.

Five Star's Board of Directors have recommended a vote in favor of approval of the issuance. SNH and ABP Trust, which collectively own approximately 44% of Five Star's current outstanding shares, have entered into agreements to vote their shares in favor of the issuance. Five Star and RMR insiders own an additional 7% of Five Star's outstanding shares, bringing the total ownership of affiliates and insiders to over 50%. The share issuance will further align SNH and its shareholders with Five Star's future success.

This transaction was agreed upon after numerous meetings and negotiations between both Five Star's and SNH's special committees of independent directors and trustees, respectively, and their advisers over the course of 4 months. These negotiations were complex and thorough and took into consideration the outcome for both companies.

Our special committee seriously evaluated multiple options, including seeking bankruptcy protection to reorganize Five Star. Ultimately, they were able to reach an agreement with SNH that they believe was the best possible solution for our company and its shareholders. These transactions will immediately address our current liquidity challenges and materially improve our long-term financial outlook.

Accordingly, with projected annual EBITDA of $20 million to $30 million, minimal capital expenditure requirements, low leverage and a continued direct ownership of 20 senior living communities, we believe this transaction is a permanent solution.

Five Star will be one of the most financially stable senior living operators of size in the country, and without the cloud of financial uncertainty under which we have been operating, we will be able to focus on providing an exceptional experience for our residents, clients and team members and evolving our service offerings to meet the changing needs of older adults.

Moving on to senior living operational performance for the quarter. In the first quarter, we reported total occupancy of 82.9%, which was up 120 basis points compared to the same quarter last year and flat sequentially. Average monthly rate for all of our communities, leased and owned, increased both year-over-year and sequentially in the first quarter.

Sequentially, average rates were up 2.3%, with each operating segment reporting between a 2% and 3% increase. We have met our intended goal of enrolling 8 to 10 communities per month, with a total of 177 communities enrolled in our revenue management program. We are continuing to track to our objective of rolling out, operationalizing and evolving our revenue management program in 2019.

Certain of our communities have been enrolled in the program for over a year now, and we are starting to experience instances where occupancy is reaching the level where we can increase rates. This is evident in our first quarter results. The combination of increased occupancy and average rate resulted in an increase in senior living revenue for the third consecutive quarter and an increase in comparable community senior living revenue of 1.6% compared to the same quarter last year.

Despite the growth in revenue, operating performance from our communities decreased 12.5% compared to the first quarter of last year. As discussed on our call last quarter, we have a renewed commitment to and are investing in our team members, which is the reason for this decline.

Total wages and benefits were up 5.5% compared to the same period last year. Part of the commitment to retain and motivate our workforce includes recognition through compensation. Accordingly, we invested in our team members through increases in base pay and are already benefiting from this investment through talented new hires and a noticeable reduction in company-wide team member turnover.

In the quarter, we hired 18 new executive directors at our community. And in March, we saw company-wide team member turnover of 35%, which was down from 57% in January and down from 63% in March of 2018.

We want to continue to attract and retain the best talent. And we intend to do so by providing them the tools necessary to be successful, recognizing and rewarding those successes and building a culture of accountability, transparency and innovation.

Ageility Physical Therapy Solutions, our Rehabilitation and Wellness division, continued its growth in the first quarter. Revenues reported were $10.4 million, which is a 20% increase compared to the first quarter of last year, and as a result of us opening 33 new clinics since then.

In the quarter, this group opened another 9 outpatient clinics, 6 of which are not affiliated with the Five Star community. We intend to continue to grow this line of business in 2019 and beyond and will evaluate and develop other complementary ancillary businesses.

Before I turn the call over to Rick, I'd like to give an update to the progress of one of our new key senior living operational initiatives as well as mention our new collaboration with the MIT AgeLab and our sponsorship opportunity with the National Senior Games Association.

We continue to focus on providing an exceptional resident experience in our communities through our partnership with J.D. Power and Associates with respect to their Senior Living Community Certification Program.

I am proud to report that as of last week, Five Star has 11 communities that have received the J.D. Power Senior Living Community Certification, adding 8 communities in the quarter. While our goal is to continue to add to the number of Five Star communities that receive this valued certification, our primary focus is to drive operational excellence consistent with the over 170 J.D. Power operational best practices.

As always, Five Star remains committed to honoring our residents and clients and recognizing the remarkable achievements of older adults. As we navigate changing demographics and other factors impacting our industry, we are focused on deepening our understanding of the changing needs of older adults and reaffirming our commitment to bringing enrichment to their lives.

I am pleased to announce Five Star's and Ageility's sponsorship of the 2019 National Senior Games, the largest qualified multisports event in the world for older adults aged 50 and older. Held biannually throughout the United States since 1987, this year's games will be hosted by Albuquerque, New Mexico, from June 14 through June 25.

The National Senior Games Association is dedicated to motivating older adults to lead healthy lifestyles. This year, there will be over 900 competitions in 20 medal sports. With health and wellness as one of Five Star's core pillars, we are proud to collaborate with NSGA to inspire athletes across generations.

Five Star also recently joined the MIT AgeLab Home Logistics Consortium. Part of the Massachusetts Institute of Technology, the MIT AgeLab believes that the convergence of social, demographic and technological forces provides the opportunity to improve connectivity, convenience and care in the home for consumers of all ages.

The Consortium is designed to serve as a catalyst for research and innovation for like-minded firms from a variety of industries. Participation in this collaboration will further our understanding of the needs of older adults and how our services can evolve to support those needs, wherever they may call home.

Additionally, this collaboration furthers the commitment to our team members to foster a culture of innovation. I'm personally excited about both these partnerships with like-minded organizations that have shared values and a shared goal of supporting, honoring and enriching the lives of older adults.

And finally, I'd like to take a moment to thank Rick Doyle for his many years of service to Five Star as our CFO. I can speak for everyone at Five Star saying that we will miss him and as a -- as a leader and a friend.

I will now turn the call over to him for a discussion on the financial results.

Thank you, Katie. I appreciate your kind words and will miss you and everyone at Five Star. I've enjoyed my time here and wish Five Star much future success.

Early this morning, we reported $2.4 million of adjusted EBITDA for the first quarter of 2019, which was up $6.1 million for the same quarter last year.

Adjusted EBITDA for the first quarter of 2019 includes a $7.7 million adjustment for transaction costs and $14.4 million of rent reduction for February and March 2019 related to the transaction agreement entered into with SNH.

As Katie mentioned earlier, as part of the transaction agreement, SNH reduced our rent from $17.4 million per month to $11 million effective February 1. Because the transaction agreement was not entered into until April 1, our actual rent expense under GAAP was not adjusted in the first quarter. Therefore, in our supplemental information, we show the rent reduction as an adjustment to adjusted EBITDA.

Senior living revenue for the first quarter of 2019 was $277 million, an increase of $2.4 million or 0.9% compared to the same period last year. The comparable community senior living revenue was up $4.4 million or 1.6% compared to the same period last year. The revenue increase was primarily due to increases in occupancy and average monthly rates.

Senior living wages and benefits increased 5.5% year-over-year to $144 million or 51.9% of senior living revenue. Last quarter, we had a similar year-over-year increase in wages and benefits, which was mainly a result of our use of contract labor as well as overtime costs.

As I mentioned last quarter, one of our main goals heading into 2019 was to decrease employee turnover and eliminate the use of contract labor. As a result, this quarter's increase in wages and salaries came largely from increases in standard pay. And we have experienced a decrease in team member turnover, as Katie mentioned earlier.

Other senior living operating expenses for the quarter were $77 million or 27.7% of senior living revenue. On a comparable community basis, operating expenses increased approximately $3.4 million or 4.7% compared to the same period last year.

Similar to past recent quarters, the increase here is largely related to repairs and maintenance and other purchase services expenses. We continue to invest where needed to keep our units up to the quality standards of today's demand and in line with new competition.

General and administrative expenses were at $26.5 million for the first quarter and included $7.7 million of transaction costs incurred in connection with the transaction agreement with SNH. Excluding the transaction costs, general and administrative expenses were $18.8 million, a decrease of 5.7% compared to the same quarter last year and 4.9% of all revenue from communities we own, lease and manage.

Interest expense for the first quarter was $900,000, an increase of [28.9]% compared to the same period last year. The increase is due to higher borrowings on our credit facility compared to the same period last year.

At March 31, we had $49.7 million of cash and cash equivalents and $51.5 million of outstanding on our revolving credit facility. At quarter end, we had approximately $223 million of net property and equipment, including 20 communities we own, 1 of which is encumbered by mortgage note of $7.9 million with an interest rate of 6.2%.

Subsequent to quarter end, SNH purchased approximately $50 million of PP&E related to the leased senior living communities. We also entered into an agreement with them pursuant to which we were extended a $25 million line of credit. As of today, we do not have any borrowings outstanding on the SNH line of credit. And we are evaluating options to refinance our credit facility, which expires in June 2019.

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

Thanks, Rick. Last quarter, I indicated that 2019 will be a transformational year for Five Star. While the restructuring of our business arrangements with SNH is a long-term solution to our financial challenges, it is only the first step in our transformation.

In the first quarter, through our investment in our team members and our partnerships with J.D. Power, the MIT AgeLab and the National Senior Games, we have demonstrated our dedication to operational excellence and an exceptional resident, client and team member experience as well as evolving our service offerings to meet the changing needs of older adults. I am confident that we will continue to make progress. And with one major hurdle behind us, I remain excited about our future.

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

(Operator Instructions) Since there appears to be no questions, the conference today will end. So thank you for attending today's presentation. You may now disconnect. Thank you again.