Alerislife Inc (ALR) 2021 Q1 法說會逐字稿

Good day, and welcome to the Five Star Senior Living First Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Olivia Snyder, Manager of Investor Relations. Please go ahead, ma'am.

Thank you. Welcome to Five Star Senior Living's First Quarter 2021 Earnings Call. The agenda for today's call includes a presentation by President and CEO, Katie Potter; Executive Vice President and COO, Margaret Wigglesworth; and Executive Vice President, CFO and Treasurer, Jeff Leer, followed by a question-and-answer session with research analysts.

I would like to note that the transcription, recording or retransmission of today's conference call is strictly prohibited without the prior written consent of the company. 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, Thursday, May 6th, 2021. 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.

In addition, this call may contain non-GAAP numbers, including EBITDA and adjusted EBITDA. Reconciliations of net income to these non-GAAP figures and the components to calculate them are available in our quarterly results news release available on our website at fivestarseniorliving.com.

I will now turn the call over to Katie.

Thanks, Olivia. And thanks everyone for joining us on our earnings call for the first quarter of 2021. A few weeks ago, we announced the next step in the transformation of our business as a provider of senior living and rehabilitation and wellness services that support, enrich, and inspire the lives of older adults as they age. This transformation builds on the initial restructuring of our business arrangements with Diversified Healthcare Trust in 2019. Which provided financial stability and will now better position Five Star to capitalize on the growing population of older adults and their changing needs and preferences. Our 3-pronged strategy, reposition, evolve, and diversify begins with the repositioning of our senior living management services offering and the continued growth of our agility outpatient rehabilitation services to align with our areas of strength and favorable market opportunities.

It continues by prioritizing the evolution of our choice-based financially flexible resident experience and our shared services infrastructure to support improved operations. Finally, our strategy focuses our future growth on the diversification of our revenues by continuing to build out our services offering and reach a broader customer base. The repositioning of our senior living management services is expected to be completed by the end of 2021 and involves transitioning 108 smaller senior living communities with approximately 7,500 units to other operators, closing the healthcare units within our continuing care retirement communities, or CCRCs, containing approximately 1,500 units and completing our exit from skilled nursing.

Over the past several years we have strategically reduced our exposure to skilled nursing, a line of business that has been subject to increasing regulation, fluctuating reimbursement rates, and ongoing labor challenges. The exit from this non-core part of our business allows us to focus on the service lines that we believe can better leverage our scale and expertise to improve profitability as industry conditions stabilize.

Five Star will continue to operate 144 senior living communities, with over 20,000 units located in 28 states. These communities are strategically positioned to benefit from high demand and a growing population of older adults that fit our target consumer. 75% of the communities that we will continue to manage for DHC are located in markets where the median income of the over 65 population can afford an average monthly rent of $4,000. And 70% are in markets with no current new competition under construction. These communities outperformed the total managed portfolio in the first quarter of 2021, with 320 basis points higher average occupancy, approximately 400 basis points higher EBITDA margin, and a more efficient labor cost structure. Following the completion of the repositioning, as we are able to focus on our core portfolio, we expect to grow and expand our management services offering and reduce our concentration with one owner.

We are also working on centralizing certain functions to achieve greater efficiency as well as investing in our technological infrastructure to support and optimize a scalable platform. In addition, we will continue to refine our senior living product to build our competitiveness in the market while taking advantage of new opportunities beyond traditional senior living demand. We find our emerging customer to be one that values a curated approach to meeting their care needs and lifestyle aspirations, especially one that enhances their ability to retain independence and improve quality of life.

As we focus our senior living management services, we will continue to grow our service offerings to enhance the resident experience and support longer lengths of stay, as well as reach customers outside of our senior living communities. We have shown success with our rehabilitation and wellness services segment, including agility, which over the last 2 years has become an integral part of our services platform and has achieved significant growth in scale and revenue. Agility rehabilitation offers senior living communities a turnkey solution clinically proven to improve physical conditioning for residents and drive positive business outcomes for the communities within which it operates.

Agility rehabilitation proactively addresses health risks to improve mobility and functionality which supports resident independence and inspires an active, fulfilling lifestyle. We will continue to drive revenue growth through agility by expanding into additional compute communities, both within the Five Star footprint and unaffiliated. As well as actively engaging a broader client base outside the community setting.

Additionally, we are planning continued growth of our other service offerings, including fitness, home health and concierge services, which are all existing areas of organic growth for the company. We will continue to incubate these business lines by piloting best-in-class programs internally and evaluate other growth opportunities through strategic partnerships for acquisition. Our strong financial position, coupled with our plan to narrow and hone our senior living management services, will allow us to make strategic proactive moves to grow our business in areas that we excel and in areas we see strong market opportunity.

We will also focus on evolving our resident experience, improving our corporate infrastructure, and expanding the services we offer older adults. Five Star's continuous care and growing platform of services are positioned to capture positive demographic and industry trends that will not only support a post-COVID-19 occupancy recovery but future growth. We believe the repositioning of our senior living portfolio as part of our larger strategic plan is a critical step in capitalizing on the next frontier of market opportunities to serve the fastest growing demographic in the U.S.

Before I turn the call over to Margaret to review our senior living and rehabilitation and wellness operations for the quarter, I would like to take a moment to acknowledge the entire Five Star organization for exceptional service and dedication through the unprecedented challenges of the past year. Thank you for your steadfast commitment to safety, care, and engagement with all residents, clients, and colleagues. We look forward to these exciting changes for our business and future success as an organization.

Thanks, Katie, and good afternoon, everyone. As our senior living and rehabilitation and wellness services continue to adapt to the COVID-19 environment, we believe we have responded quickly to the changing needs of our residents and clients, and have laid solid groundwork for our paths to recovery. Let me start with senior living. In early April, we successfully completed all scheduled vaccination clinics at our senior living communities, and we believe this marks an important milestone in our recovery from the effects of the COVID-19 pandemic. As of May 1st, the overwhelming majority of our residents and about half of our team members are fully vaccinated. And we are welcoming new residents in all of our communities.

Current active COVID cases are low, with only 12 active cases in our population of approximately 21,000 residents, which represents a 98% decline on a trailing 2-week basis from the peak rates in the fourth quarter. As we continue to adhere to careful health protection protocols, we are happy to return to a robust resident experience by safely rolling out full dining programs, extended programming, social activities, and tours. Recent guidance from the Biden administration and the CDC around easing restrictions as a result of positive acceptance of the vaccine is also encouraging as we work to build confidence in safety and normalcy in our communities. We are encouraged by the momentum of our sales leads and move-in activity since the start of the year and are happy to report the first 2 consecutive months of a month and spot occupancy growth since February 2019.

With a significant decline in COVID-19 cases, broad accessibility to the vaccine, and a return to pre-pandemic lifestyle, we are seeing that customers are back in the market for senior living options. The picture is clear, there is an increased consumer interest in exploring senior living demonstrated by our web traffic and web leads, both of which were up significantly quarter-over-quarter and year-over-year, exceeding pre-pandemic levels. Resident referrals and professional referrals both increased from the fourth quarter. Not only did tour activity for the month of March meaningfully exceed February, our repeat tour volume is also up significantly quarter-over-quarter. We are optimistic to see that these positive leading indicators have also been reflected in our move-in activity over the course of the first quarter.

We saw our conversion rates improve by 710 basis points from January to April, and net moves have been improving since December, and shifted to net positive gains in February. While we continue to see an overall occupancy decline in the first quarter, we believe that in continuing our aggressive marketing and sales campaigns we will begin to see positive movement in late Q2 and into Q3. Average occupancy in our comparable community owned and leased portfolio decreased 3.2% sequentially and 13% from the prior year. Comparable community average occupancy in our managed communities decreased 2.9% sequentially and 13.3% from the prior year.

Since quarter end, and adjusting to reflect only the retained managed portfolio following the repositioning, and excluding the health care units we expect to close, spot occupancy at the end of April was 73.8%, an improvement of 60 basis points from March.

While we see RevPAR trending up slightly from the first quarter last year, RevPAR continues to be challenged due to occupancy decline. With comparable community RevPAR for the owned and leased portfolio down 15.4% from the same period last year, and comparable community RevPAR in our managed portfolio down 15.1%. We have launched targeted concession programs in aggressive markets to regain market share where appropriate, but remain committed to preserving rate while focusing on safely and expeditiously reinstating the full resident experience.

Turning to our rehabilitation and wellness services, we were able to successfully open 8 net new agility outpatient clinics in the first quarter, exceeding our expectation of 2 to 4 clinics. Which partially offset a decrease in overall revenues due to a reduction in inpatient clinic visits as a result of COVID-19. Outpatient revenues increased 6.5% year-over-year, and total segment revenues on a comparable basis increased slightly with operating margin improving by 4.8%. We are seeing recent improvements in clinic visit activity, with a steady positive progression from January through March. In addition to external growth beyond Five Star communities, we continue to focus on same store growth.

Our investment in evidence-based clinical programming has yielded measurable outcomes for our clients, including reduced fall risk, improved gait speed and increased mobility. Communities that offer agility rehabilitation services also benefit by helping to prevent injuries that necessitate moves to higher levels of care, or more acute care settings, and supporting higher residents satisfaction and longer lengths of stay. While it is difficult to predict a turnaround for our industry against the backdrop of the pandemic, we are hopeful that the completion of our vaccination program and the positive trends with leads, tours and move-ins as well as our demonstrated success with our ancillary services will lead us toward recovery.

I will now turn the call over to Jeff for a discussion of the financial results.

Thank you, Margaret. As Katie highlighted, the recently announced repositioning of our senior living management business heralds a positive strategic change to drive long-term growth and value creation. The transitioning communities represent approximately 40% of our management fee revenues from DHC for the quarter ended March 31st, but less than 15% of our total top line revenues. We expect to offset some of this revenue decline with cost savings and reductions in our G&A expense as we reorganize our corporate and regional functions. Taking out the effect of the one-time cost attributable to the repositioning and other corporate infrastructure investments, we anticipate the annual G&A savings of $12 million on a normalized basis.

We provided information in our earnings release on the impact to revenues at communities we manage on behalf of DHC, and a management fee paid to Five Star after execution of the repositioning. The cadence of the reduction on our management fees is uncertain, as it is dependent on when the various communities transition to new operators. But our general expectation is for the transition to be complete by year-end. We also expect to incur nonrecurring cash expenses of up to $5.5 million after the effect of DHC-reimbursed amounts, which are primarily severance and retention costs. We expect the majority of costs to be recognized in Q2 and paid during the latter half of 2021 and early 2022.

Additionally, in connection with our strategic plan, we expect to close 37 agility inpatient clinics that generated $5.4 million of revenue in Q1 or 27.8% of total revenue for the rehabilitation and wellness services segment in the first quarter. Our movement away from the inpatient rehabilitation services aligns with our overall strategy to exit the skilled nursing line of business. In conjunction with the transition of our managed portfolio, we've agreed with DHC to make the following changes to the management agreement. First, we are eliminating DHC's right to sell additional communities and terminate Five Star's management agreement without payment to Five Star of a termination fee.

In the original agreement from 2019, DHC had the ability to sell communities of up to $775 million of value without a termination fee, with $682 million remaining as of March 31st, 2021. Second, we are eliminating the cap on the incentive fee that Five Star can earn previously, set at 1.5% of gross community revenues. That's allowing Five Start greater opportunity to share in the (inaudible) performance achieved versus targeted EBITDA.

Third, we are modifying DHC's performance termination rights, which in the current management agreement provide DHC the right beginning in 2023 to terminate up to 20% of the total managed portfolio revenue for any community that does not achieve at least 90% of budgeted EBITDA. These termination provisions will now begin in 2025, lower the maximum amount of communities that can be terminated per year to 10% of portfolio revenue, and lower the performance target to 80% of budgeted EBITDA. And lastly, we're also extending the term of our management agreement by 2 years, to December 31st, 2036. These terms provide Five Star with greater flexibility and stability in its current managed portfolio.

We are confident that we are well positioned to execute the repositioning and our ongoing strategic initiatives with a strong foundation of financial liquidity that continues to improve. As of March 31st, we had approximately $109.5 million of unrestricted cash and cash equivalents and only $7.1 million of outstanding debt obligations in the form of one mortgage note maturing in 2032. As of today, we do not have any borrowings outstanding on our credit facility.

Moving to our quarter results, last night we reported net income of $3.3 million or $0.10 per diluted share for the first quarter of 2021, compared to a net loss of $17.2 million or $0.55 per share for the first quarter of 2020, which included $22.9 million of onetime lease termination expense related to the 2020 restructuring transaction with DHC.

Net income for the first quarter of 2021 includes $7.8 million of income recognized under the CARES Act provider relief fund, due to the ongoing impact of the COVID-19 pandemic on our senior living occupancy, revenues, and expenses. Adjusted EBITDA for the first quarter was $6.9 million, a decrease of $5.5 million or 44% from $12.4 million in the prior year period.

First quarter management and operating revenues were approximately $50.5 million, a decrease of $9 million, or 15.1% from the prior year, primarily due to decreased occupancy in our senior living segment as a result of COVID-19 as well as the impact of the sale of 9 senior living communities and the closure of 7 senior living communities in 2020 that we previously managed for DHC. Our rehabilitation wellness services segment report revenues of $19.6 million, a decrease of $1.8 million or 8.6%, as compared to the prior year period, primarily due to a reduction of agility inpatient clinic visits as a result of COVID-19. Partially offset by the opening of 21 net new outpatient clinics since January 1st, 2020.

Our senior living segment reported total revenues of $249.5 million, of which $17.1 million was derived from communities that we own or lease from third parties. And $13.9 million was attributable to management fees earned from communities we managed for DHC. Total revenues represent a 9.6% decline compared to the prior year period and a 6.1% decline on a sequential basis. Of the $13.9 million in management fees earned, $830,000 were attributable to construction management fees at managed communities. Construction projects managed on behalf of DHC totaled $27.8 million, of which $21.9 million related to recurring maintenance capital. Following the changes to our management agreement, Five Star will continue to receive a 3% capital management fee on all recurring capital, which is expected to be $16.3 million for the remainder of 2021.

Now turning to operating expenses. We incurred $273.2 million of total operating expenses in the first quarter, including $213.2 million of reimbursed costs incurred on behalf of managed communities. Excluding the impact of reimbursed expenses, our total operating expenses increased $3.3 million or 5.7% from the same period last year, primarily due to increased labor and operating costs at our owned and leased communities as a result of the lingering effects of the COVID-19 pandemic.

Moving to COVID-19-related expenses. During the first quarter we spent $6.1 million, including $2.9 million on PPE and medical supplies. We deployed $900,000 of pre-funded PPE reserves to communities and maintained a balance of $8.8 million that we expect to further reduce throughout 2021. As a reminder, the majority of this pre-funded PPE will be reimbursed by DHC as it is delivered to the communities we manage. Of the total first quarter COVID-related expenses, $5.8 million was absorbed by DHC. Total cost represent a 24% decline on a sequential basis due to the impact of our vaccination rollout and further reduction in confirmed COVID cases. As COVID infection rates decline and vaccination levels increase in the communities, state regulations on certain health and safety protocols are reduced. And we anticipate decreased testing and treatment costs to benefit our operating costs in the coming quarters.

General and administrative expense for the first quarter was $22.6 million, which included $5.5 million reimbursed by DHC. Our net G&A expense of $17.2 million increased approximately $209,000 or 1.7% from the prior year period, primarily comprised of $250,000 related to the repositioning as well as additional corporate funding to support communities through the COVID-19 pandemic.

That concludes our prepared remarks. Operator, we are ready to open the line for questions.

(Operator Instructions) And the first question will come from Kyle Menges with B. Riley FBR.

This is Kyle on for Bryan. So Katie, in your prepared remarks you mentioned that you'd like to expand management of communities on behalf of others besides DHC. What kind of opportunities are you currently seeing to do that? And what size portfolios make the most sense?

Kyle, I think right now we're really focused on completing the repositioning and improving operations within that portfolio. I think when other owners can see our operational strength coming through in that portfolio, that we're going to be able to identify opportunities. But as I say, right now we're prioritizing the repositioning and improving operations there.

That makes sense. And then I saw 85% of residents have been vaccinated. If you take out those 108 communities you plan to transition, is it still about that 85% after you take those out?

Yes. Kyle, this is Margaret. It is about 85% across the board.

Okay. And then, what percent of staff have been vaccinated at this point? And do you think you could mandate that all staff get vaccinated? And are you seeing that from other industry players?

We're just below 50% of our team members being vaccinated. And we do see other operators mandating the vaccine, and we see the benefit of that. At this particular point in time we're continuing to evaluate whether or not that makes sense for us.

Great. And then I was also curious, at the 108 communities you plan to transition, how many agility clinics are in that portfolio? And then, how many do you think you could possibly retain after those communities are transitioned?

Kyle, there's 44 outpatient clinics in those communities. And frankly, we expect to retain most, if not all of them. We highlighted in our remarks, agility's been an excellent area of growth for us and is really a benefit at the community, so we think the operators that DHC transitions to will see that as well. And so we're hopeful that all 44 remain intact.

This concludes our question-and-answer session. I would like to turn the conference back over to Katie Potter for any closing remarks. Please go ahead, ma'am.

Thank you for joining us this afternoon. As we embark on the strategies discussed today, we are excited for what the future holds. And confident that this sharpened focus will showcase Five Star's operational strengths, align with market opportunities and changing consumer preferences, and evolve our services offering for continued growth. We look forward to updating you on our progress in the coming months.

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