Alerislife Inc (ALR) 2020 Q4 法說會逐字稿

Good day, and welcome to the Five Star Senior Living Fourth Quarter 2020 Financial Results 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.

Thank you. Welcome to Five Star Senior Living's Fourth 2020 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, February 25, 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, adjusted EBITDA and proforma 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 fourth quarter of 2020. 2020 was a year we will likely never forget. I'm truly proud of what Five Star has been able to accomplish despite the challenges of the pandemic and of the resilience that the industry has shown as a whole. Above all, I am truly grateful for the courage and spirit that our team members have shown through this time and their unending dedication to our residents, clients and each other.

2020 was also a year that marked an important turnaround in Five Star's business. On January 1, we completed the restructuring of our business arrangements with Diversified Healthcare Trust, a transaction that had an immediate positive impact on our financial stability, allowed us to focus on optimizing our Senior Living operations and provided us with the liquidity to make strategic investments in our business to support new initiatives and future growth. Now more than ever before, attracting, inspiring and retaining top talent remains the biggest challenge and opportunity in the Senior Living industry. Our team members are and have always been our most important assets. In the work environment presented by the COVID-19 pandemic, their commitment to our shared mission has been integral to the safety and well-being of our residents and clients.

Sustaining the resident experience through the pandemic has been no easy task, but it has remained central to our strategy throughout our COVID-19 response, whether it is technology for virtual programming and family connection, outdoor programming and events, resourceful yet safe opportunities for social connection and socially distance dining, are unwavering focus on our customer will support the recovery of our business as the impact of the pandemic subside. Investments in our shared services platform have allowed us to continue leveraging our scale to improve cost structure, drive revenue and achieve maximum operational efficiency despite the challenges of the pandemic. This has been especially important during the period of declining occupancy in 2020. In addition to targeted cost controls implemented to align with unexpected lower occupancy levels, our centralized sourcing programs have resulted in $2.4 million of annualized cost savings over the last year. And we anticipate that upon a complete implementation of these initiatives, we will achieve $4 million to $6 million of cost savings annually in our Senior Living segment.

Our revenue management program, which realizes dynamic pricing models to drive rate optimization, has also helped support our stable RevPAR performance throughout the year. With a focus on continued growth, we are always seeking and evaluating opportunities to grow our Senior Living Management business as well as expand our offerings into other areas to meet the changing demands of older adults. Our commitment to our Rehabilitation and Wellness Services segment continues to serve us well. It now represents 38% of our total management and operating revenue, up 5% from a year ago.

Consistent revenue growth in this segment has provided stability to our financial results in a challenging operating environment, a testament to the benefit of our revenue diversification strategy. Demand for rehabilitation services remains high, and we are continuing to open new clinics where we can, given the restrictions across Senior Living communities that have persisted through the fourth quarter and into the first quarter of 2021. As restrictions are listed alongside widespread availability of COVID-19 vaccines, we are confident in the expansion of our Ageility footprint within the current networks and with new partnerships.

Turning to the fourth quarter. The near-term impact of the COVID-19 pandemic remain challenging across the Senior Living industry. The second wave of COVID is across the country following the fall and winter holidays has been severe, and our industry at large is seeing the effect of continued occupancy deterioration, revenue pressure and operational headwinds as a result. The health and wellness of our residents, clients and team members remains our highest priority and adherence to our safety and testing protocols unchanged. However, we are encouraged by a new step in our ever-evolving response.

On December 19, we began hosting vaccination clinics for our residents and team members at our communities. Margaret will provide more detail on our activity to date, but we are making strong progress and anticipate that vaccination clinics will be substantially complete across all of our eligible communities by the end of the first quarter. Adoption of the vaccine is an important step towards the industry returning to pre-pandemic fundamentals. Occupancy recovery will take some time, but the increase in sales lease that has already started to build across our portfolio shows positive momentum, and we are hopeful to see the pace of move-ins begin to accelerate.

As related to (inaudible) data showed, Senior Living inventory growth continued throughout 2020 as a result of investment that was made 18 to 24 months ago. However, construction starts have slowed, so inventory growth should taper off in 2021. Increasingly positive demographic trends also reinforce our confidence in the enduring demand for Senior Living. The U.S. 80-plus population is projected to grow by 18% from 2020 to 2025, more than 5x the rate for the overall population. As a result, we expect to see favorable supply and demand dynamics to support our business as we look out past the impact of COVID-19 into a more stabilized environment.

Despite the industry-wide challenges I discussed, our financial position in the fourth quarter has remained profitable. We have continued to generate net income, reinforcing our focus on revenue diversification and expense management. For the fourth quarter of 2020, we reported adjusted EBITDA of $5.2 million, net income of $0.09 per diluted share and a 9% increase in our Rehabilitation and Wellness Services segment revenues over the prior year proforma results.

Our balance sheet and liquidity remain healthy and provide a foundation for continued profitability as well as future growth, including investment in our owned and leased senior living portfolio to remain a strong competitor in the market; in Ageility and other ancillary services to differentiate our service offering and diversify our revenue; and in the people and technologies that support our shared services platform. We believe our operating model and financial resources will allow Five Star to endure the continuing effects of the pandemic and position us well as the vaccination program is completed and the underlying drivers of our business stabilize. As always, our success centers around our talented and committed team members, who, every day, are delivering a safe and fulfilling experience in our communities and clinics. Now I'd like to turn the call over to Margaret to review our Senior Living operations for the quarter.

Thanks, Katie, and good afternoon, everyone. As we begin 2021, we are encouraged by the outlook for our vaccination program and inspired by the commitment we see across our team member and resident populations to stand together and make this coming year better than our last. As Katie noted, we began hosting COVID-19 vaccination clinics at our communities on December 19. As of February 20, more than 25,000 residents and team members have received the first dose of a vaccine, of which more than 15,000 residents and team members have also received the second dose, averaging more than 630 vaccinations a day. We have conducted 672 vaccination clinics across 249 of our 251 eligible communities. Our COVID-19 task force has moved seamlessly to coordinate the logistics of our clinics. And as Katie mentioned, we anticipate that all clinics will be substantially complete by the end of the first quarter.

We expect to host 3 clinics at each eligible community, scheduled according to the requirements for the two doses of a vaccine. This ensures that any resident or team member who missed their community's first clinic, would still be able to receive the full dosage. We are heartened to see how our residents and team members have responded with optimism and a very hopeful outlook for a sense of normalcy to return. Gaining momentum with the program to patients in consideration of logistic challenges, as we've seen across the industry and beyond. Without a federal mandate, we're working with the individual states, each of which has adopted its own protocols for vaccine distribution, which include different timelines and prioritizations by age group or type of senior living community residents.

Another challenge we've seen industry-wide is addressing concerns among team members in our communities who are evaluating whether to receive a vaccine. Various strategies have been used across the industry to motivate and gain widespread acceptance by employees. At Five Star, we've focused on education, including regular communication from our Chief Medical Officer, about the benefits and risks so that each team member has the ability to make an informed decision. We're happy to see that vaccine adoption has improved as concerns are alleviated. We believe widespread acceptance of the vaccine is what is best for our company, our residents and clients and our team members. As was the case with our initial pandemic response and implementation of an effective infection control protocol, it is an evolutionary process, and we're gaining ground every day.

Now an update on community response to COVID-19. As of February 20, 98% of our communities are accepting new residents in at least one line of business, which we attribute to our thoughtful and comprehensive COVID-19 response strategy. We have maintained our strict testing and screening protocols, including routine surveillance testing and our communities have seen a steady decline in infection rates. Over the course of the pandemic, we have administered more than 290,000 resident and team member tests, which have resulted in a low confirmed case rate of only 3.1%. Resident cases on a trailing 2-week basis rose during the fourth quarter to above prior peak levels from July, but our most recent numbers show a 72% decline from the fourth quarter average. Our current resident infection levels are the lowest we've seen in our communities since early October.

We believe that our regimented protocols have helped to mitigate widespread exposure, but the pandemic continued to put pressure on our Senior Living segment with further occupancy decline in the fourth quarter. Average occupancy in our comparable community owned and lease portfolio decreased 3.2% from last quarter and 9.9% from the prior year. Comparable community average occupancy in our managed communities decreased 3% from last quarter and 10.8% from the prior year. We expect to see continued deterioration through the first quarter of this year but are hopeful that completion of our vaccination program will support our efforts to drive new admissions and recover lost occupancy.

We have remained focused on our sales and marketing efforts and are encouraged to see positive trends emerging. Rolling 4-week sales leads as of February 20, were up 83% from the start of the fourth quarter. And as a historic leading indicator of future move in activity, this significant increase in leads is a key step in our recovery. We remain focused on evaluating lead quality and driving our conversion rate. RevPAR continues to be challenged because of occupancy declines with comparable community RevPAR for the owned and leased portfolio, down 11.7% from the same period last year and comparable community RevPAR in our managed portfolio, down 12.3%.

We are seeing competitors offering deep concessions to attract new residents and have considered targeted concessions at Five Star in certain markets or community types where demand dynamics are less favorable. On a RevPAR basis, the fourth quarter showed slight increases over the prior year and sequentially in both our owned and leased and managed portfolios. In conjunction with our focus on optimized revenue management programs that Katie mentioned earlier, we believe that our commitment to preserving rate in most cases, despite pressure on near-term occupancy in the COVID environment, avoids long-term revenue deterioration and better positions our Senior Living operations for recovery. Most importantly for us, today, the implementation of our vaccination plan is a significant step in that recovery. We are making great progress toward our goal, thanks to the dedication and determination of our residents and team members. We will use the knowledge we have gained along with rigorous safety protocols and unwavering focus on the resident experience to drive a thoughtful and measured approach to recovering occupancy and advancing Five Star's business. I will now turn the call over to Jeff for a discussion of the financial results.

Thank you, Margaret. As Katie highlighted, the restructuring of our agreements with DHC at the start of 2020 immediately improved our financial position and liquidity and provided us with a strong foundation, as our country and our industry, in particular, entered a period of unprecedented economic uncertainty. While the events of 2020 disrupted the cadence of many of our strategic initiatives as priorities shifted to address safety, laboring, expense control and support of the resident experience in new ways. We believe that our results throughout the year have proven the strength and resilience of our business model, and we are confident that we are well positioned to sustain our strategic initiatives in 2021.

Moving to our quarterly results. Last night, we reported net income of $2.9 million or $0.09 per diluted share for the fourth quarter of 2020 compared to net income of $16.1 million with $3.15 per diluted share for the fourth quarter of 2019, which included a benefit of $14.9 million related to the restructuring transaction. For a more comparative illustration, following financial presentation, we'll compare the fourth quarter of 2020, with the proforma fourth quarter of 2019 as if the transaction with DHC had closed on January 1, 2019, to better evaluate this quarter's results.

On a proforma basis, our net income was $2.9 million or $0.09 per diluted share for the fourth quarter of 2020, represents a 50% decrease compared to net income of $5.8 million or $0.18 per diluted share for the same period last year due to the ongoing impact of the COVID-19 pandemic on our occupancy, revenues and expenses. The fourth quarter of 2020 includes $1.9 million of income recognized under the Cares Act provider relief fund. Adjusted EBITDA for the fourth quarter was $5.2 million, a decrease of $5.1 million or 49% from $10.3 million in the prior year period.

Fourth quarter management and operating revenues were approximately $53 million, a decrease of $3.5 million or 6.1% from the prior year, largely due to the impact of the sale of 9 Senior Living communities throughout 2020 and the closure of 7 additional communities during the end of Q3 and into Q4, coupled with declines in occupancy in our Senior Living segment as a result of COVID-19. While our Senior Living segment experienced challenges related to the ongoing effects of the pandemic, our Rehabilitation and Wellness Services segment reported revenues of $20.3 million, an increase of $1.7 million or 9.2% as compared to the prior year period. This is primarily attributable to the ongoing opening of 30 net new clinics since October 1, 2019. Ageility Rehabilitation and Fitness continues to make up the majority of these revenues.

Our Senior Living segment reported total revenues of $265.6 million, of which $17.9 million was derived from community on a lease from third parties. $14.8 million was attributable to management fees earned from communities we manage on behalf of DHC. $232.9 million was reimbursed community level costs and other expenses incurred on behalf of managed communities. And in total, represents an 8.1% decline compared to the prior year period and a 3.1% decline on a sequential basis. Of the $14.8 million in management fees earned, $1 million was attributable to construction management fees that represent 3% of capital projects managed on behalf of DHC. Construction projects managed on behalf of DHC totaled $32.9 million and represents a 72.3% increase in capital spend on a sequential basis. We expect that as community restrictions continue to ease, we will likely experience a consistent capital spend. In 2020, DHC spent approximately $89.9 million of capital at our managed Senior Living communities.

Now turning to operating expenses. We incurred $285.5 million of total operating expenses in the fourth quarter, a decrease of 4.8% from the prior year period and a 2.1% from last quarter. We have continued to focus on managing expenses, including labor costs in response to decreased occupancy across our communities and benefited from reductions in self-insured health insurance costs of $820,000 due to reductions in high-cost claims, partially offset by an increase in expense related to COVID testing and care.

Since the pandemic, we have secured approximately $15.3 million of PPE to protect our residents and team members during the pandemic. Of this amount, $5.6 million has been deployed to our communities for use and the remaining amounts related to prefunded PPE reserves set aside to combat potential increased needs throughout 2021. As a reminder, the majority of the prefunded PPE will be reimbursed by DHC, as it is delivered to the communities we manage.

Fourth quarter COVID-19 related expenses were approximately $6.7 million, including $2.4 million spent on PPE and medical supplies. $6.1 million of this total related to our managed communities and was the result of DHC. These costs represent a 6.7% decline on a sequential basis. We believe that the pandemic will likely continue to put pressure on our self-insured health insurance program throughout the first half of 2021. However, as we see COVID infection rates decline, we are hopeful that testing and treatment costs will follow.

General and administrative expense for the fourth quarter was $20.8 million, which included $6.6 million reimbursed by DHC. Excluding these reimbursed costs, G&A expense was $14.2 million. We expect G&A expense will continue to be elevated throughout 2021, as we make further investments in our shared services and technology infrastructure.

Moving to our balance sheet. As of December 31, we had approximately $84.4 million of unrestricted cash and cash equivalents. We have only $7.2 million of outstanding debt obligations in the form of one mortgage note maturing in 2032. And as of today, we do not have any borrowings of spending on our credit facility. We believe our strong finance position, along with our stable and growing Rehabilitation of Wellness Services revenues, not only support our business as COVID-19 continues to have adverse effects on our Senior Living segment, but also will help drive our rebound as the pandemic impact subside and our path to future growth. That concludes our prepared remarks. Operator, we are ready to open the line for questions.

(Operator Instructions) The first question comes from Bryan Maher with B. Riley FBR.

I'm not sure if this question is more for Katie, or Margaret. But as it relates to the 87% of the residents that we have received at least the first dose of the vaccine, what percentage of the population in the communities do you think we'll end up getting the vaccine? I guess asked a different way, is 87% all that have asked for it? Or do you expect everybody to eventually get it and what do you do with the communities if individuals or too many individuals don't get the vaccine?

Bryan, we've had a really high positivity rate in terms of our residents wanting to take the vaccine. I think that's why you're seeing such a high percentage. As we roll through the clinics, we go through the second and third clinics, I think we'll continue to see that number rise. And so I expect it will remain pretty high as we move through the clinics. And then I'm going to let Margaret answer your second question in terms of communities that don't reach as high as we might expect.

Yes, we are working diligently on the education aspect of bringing team members, especially along the journey. And we've seen an increased adoption rate as second clinics get underway. We've used the services of our Chief Medical Officer in holding office hours for conversations. And we started a program of peer-to-peer counseling in our communities to encourage and support team members who might be on the fence.

Okay. And do you think you might be headed in a direction where you require all the team members to get it? Or is that just off the table?

Well, we are evaluating the pros and cons of that and have seen some of our competitors do it and are supportive of that initiative. We, ultimately, think that most, if not all, healthcare settings will require it. And so we're looking at moving along that path.

Okay. Great. And kind of shifting gears to your liquidity and maybe growth and deploying some of your liquidity into growth. How do you think about allocating that money to either new Ageility clinics or maybe buying some senior housing facilities that you think are in good condition, maybe even ones from DHC. Can you give us some thoughts about how you look at 2021 for deploying capital?

Sure. Obviously, 2021 is going to be primarily focused on stabilizing our Senior Living business. But in terms of looking at our capital, we're always looking for the best uses for capital to support our current business and future growth. And that certainly could include acquiring new communities to grow our own portfolio. But we continue to be focused on growth in the Ageility line of business and expect, I think, as we noted last quarter, for that to grow approximately 2 to 4 clinics a quarter throughout 2021.

Okay. And as we talked about on the DHC call earlier today, when they opt to sell a property that you guys manage, how do you deal with that and look to replace that lost income? And maybe how much lead time do you get to prepare for that?

I think it's an ongoing dialogue with DHC. We meet regularly to review the communities and discuss opportunities for those that are underperforming. So I think we regularly are in connection and understand things that may be considered for disposition or foreclosure.

Okay. And can you talk a little bit about the conversion rate on sales leads? I know you guys have talked about the increase in leads. What pushback are you getting from potential residents? And what are the prospects for overcoming that and getting them to move in in the next couple of quarters?

I think our prospects are pretty good. We -- our conversion rate is down from last year. But we've seen an increase in tours. Our lead generation is way up and we think that there is pent-up demand out there.

And can you point to things that you're looking at because I get that question a lot. They're like, okay, we get that theoretically, but can you kind of point to anything about this pent-up demand? And when does that dam break? When do they -- there's one thing that have pent-up demand, nothing to kind of hold the trigger and actually move in, right?

Yes. Bryan, I think that we often see -- we're seeing the pent-up demand materialize a little in the more needs-based line of business, I think, in particular, memory care. As you might imagine, if you were a family caregiver caring for someone with dementia through the pandemic. That's been probably a significant challenge. In addition, as office spaces start to reopen and people go back to work, we've noticed that family caregivers are looking for solutions for that. So I think we're going to see that pent-up demand be more in line with the needs baselines of business as opposed to the choice baseline of business of independent living.

Got it. That's helpful. And not looking for guidance here, more just kind of where your heads are at. But as you look at the lay of the land here in February with the vaccines and the pent-up demand and with where occupancies are currently, when we're talking a year from now on the fourth quarter '21 call, do you suspect that occupancies have stabilize, continue to go down more or turned nicely positive from where we are now?

Well, I think, Bryan, if there's anything we've learned from this pandemic is that we cannot predict the future. Obviously, things were very challenged at the end of December and into January. We've seen some positive momentum through in February. So it's very difficult to say. We certainly hope we'll be back to more normal levels of occupancy. But I think, as we said in our remarks, or I said in our remarks, it's going to probably take some time to rebuild that back to where it was pre pandemic.

This concludes our question-and-answer session. I would like to turn the conference back over to Katie Potter for any closing remarks.

Thank you for joining us today. The COVID-19 pandemic has continued to impact our lives and our business in unforeseen ways, and the leadership team and I continue to be proud and impressed by the consistent dedication of our entire team here at Five Star and encouraged as we embark on this next step in our response. We look forward to updating you on our progress in the coming months. We wish collective health and wellness to all. Operator, that concludes our call.

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