Sonida Senior Living Inc (SNDA) 2018 Q3 法說會逐字稿

Good day, and welcome to the Capital Senior Living Third Quarter 2018 Earnings Release Conference Call. Today's conference is being recorded.

The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially, including, but not without limitation, to the company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time, I would like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you, and good afternoon, and thank you for joining us for our third quarter 2018 earnings call. While we continue to operate in a challenging industry environment, we made progress during the quarter on several broad-based operational initiatives to strengthen our platform and processes.

While we achieved modest growth in occupancy and rate on a sequential basis in the quarter, we are disappointed to report decreases in other key financial metrics. As we continue to navigate difficult industry headwinds, we are addressing the issues head-on.

As Brett will discuss in more detail, we are executing on our action plans to increase revenue and reduce expenses, and we remain committed to growing our revenue, managing our expenses and providing excellent care and services to our residents. Our 2018 operational initiatives are on track to lower costs in major expense categories such as food, service contracts and supplies, and we are completing the implementation of an integrated business information system that will provide us with a higher level of data transparency and analysis.

Important aspects of this system are already in place, including the CRM, and we expect all aspects of the platform to be in place and operational by the end of the year. Consistent with our normal business practices, we are also addressing our nearest-term debt maturities to extend duration, limit our interest rate risk and strengthen our financial foundation.

The seniors housing industry is in the midst of a timing gap between the growth of the senior population and the decline in construction starts. Senior housing construction starts in the third quarter, as reported by NIC, were at the lowest level nationally since the second quarter of 2015. Fundamentally, Capital Senior Living is taking the necessary steps to be able to take advantage of an expected improvement in supply/demand dynamics when the 80-and-elder senior population's annual growth rate accelerates.

I want to take a moment now to share that last week, I celebrated my 22nd anniversary with Capital Senior Living and 19 years as CEO. As previously announced, I will retire from the company effective January 1, 2019. It has been a real honor to lead the company and our dedicated team, and I am proud of all we have accomplished. The strength of our team gives me confidence in Capital Senior Living's long-term prospects.

I will now turn the call over to our Chief Operating Officer, Brett Lee.

Thank you, Larry, and good afternoon, everyone. We are taking strong decisive actions to improve our short-term performance, while continuing to implement the foundational elements of a new operating platform that we believe will set the company up for sustained success and competitive differentiation as the industry emerges from the current mismatch of supply and demand.

We recognize the importance of both occupancy and rate on maintaining top line revenue growth and have worked over the third quarter to strike a balance between short-term pricing concessions in our most challenging markets while holding, and in some cases, increasing market rate and level of care fees in markets where we have a strong competitive position.

We anticipate that we will continue with the selective use of incentives in the fourth quarter as the industry enters a time of year in which lead volume typically slows and competition for move-ins becomes more pronounced.

Some of the greatest innovations and organizational improvements come out of challenging times, and we are working to strengthen our sales organization to be more successful, both in the near term and in the months and years to come. We continue to optimize our new CRM system to provide timely and actionable data to drive information and accountability throughout our sales force and have retrained our sales teams on core sales tactics and shortening the sales cycle and have begun the process of diversifying our lead sources through the advancement of partnerships with health care organizations and other community resources in our major markets.

Each community has developed a detailed revenue growth plan that includes increased community outreach, a focused effort to enhance lead conversions and, in certain markets, increased spending on digital marketing and social media outreach, all in an effort to drive a greater number of leads to the facilities. These plans are reviewed daily with the community leaderships and will serve as the guidepost for our local growth strategies through the remainder of the year.

As Larry mentioned, Capital Senior Living demonstrated a slight occupancy gain in the third quarter relative to the second quarter while also achieving some rate growth. Furthermore, Capital Senior Living outperformed our NIC peers in terms of overall occupancy in the third quarter for all of our major markets where we operate at least 4 communities, including Dallas, which holds our greatest concentration of communities, Indianapolis, Cincinnati and Omaha, demonstrating that we were able to hold our ground in a very competitive environment.

While we are working diligently to drive top line growth, we know that strong expense controls will also be critical to our ongoing success as we compete for occupancy and revenue. We demonstrated in the fourth quarter of 2017 and throughout 2018 an ability to manage expenses in an environment with significant cost pressures, most notably in wages. And we are focused on further enhancing these efforts, both locally and company-wide as we go forward.

Each community has developed a comprehensive expense savings plan to drive efficiencies in our operations for the remainder of the year. We continue to see the effects of greater wage pressure in the third quarter, which resulted in an increase in contract labor utilization. We plan to make some targeted investments to stabilize turnover and expect to see an associated reduction in contract labor and overtime.

In addition to the local savings plans, our new centralized operating model, designed to gain economies of scale and reduce costs systematically, are having the desired effect and we believe will be a driver of value to the company going forward. The centralized procurement platform implemented earlier this year has begun to increase utilization of our GPO contracts and reduced costs through the use of a more prescriptive formulary of supplies.

We have also seen our new national menu system reduce variation in food costs and quality and better manage our food spend. These initiatives led to a reduction in food cost of 5% for the quarter compared to the same period in 2017, with a similar percentage savings in medical supplies. We anticipate these savings will continue to grow for the remainder of the year as a result of a new produce partnership and a vendor change for our canned food products that we made in the third quarter. When fully implemented, we expect these additional initiatives to produce approximately $750,000 in annualized savings.

We also continue our efforts to consolidate our local service agreements into regional and national contracts to better leverage our scale as a larger company to drive better pricing. We have now finalized national agreements for solid waste management, elevator service, laundry services and pest control. In the fourth quarter, we will be evaluating the implementation of a national cable television service agreement as well as continued regionalization of utilities contracts. We anticipate that these contracts will be key drivers of additional savings for 2019.

While we understand that the industry may continue to face some headwinds in the short to midterm, we are confident that the actions we are taking today will allow us to emerge stronger and a more effective operating company.

I will now turn the call over to our CFO, Carey Hendrickson, to walk through our third quarter financial results in more detail.

Thank you, Brett. As we note in the press release, the company's non-GAAP measures exclude 2 communities that are undergoing lease-up of higher license units or significant renovation and conversion. The non-GAAP measures continue to include the 2 Houston communities impacted by Hurricane Harvey since our business interruption insurance restores their economic loss.

However, the statistical measures that we show on Page 11 of the earnings release exclude the results of the 2 Houston communities since they're in initial stages of lease-up and to include them will make the statistical measures less meaningful.

The company reported total consolidated revenue of $115.7 million for the third quarter of 2018, a decrease of $1.7 million or 1.4% over the third quarter of 2017. Approximately half of that decrease was due to lost revenue associated with the 2 Houston communities impacted by Hurricane Harvey.

Revenue for those 2 hurricane-impacted communities was $500,000 in the third quarter of '18 and was $1.3 million in the third quarter of 2017. As a reminder, the hurricane came through in late August of -- during the third quarter of 2017. As in previous quarters since the hurricane, we recorded a business interruption insurance credit and operating expenses in the third quarter of $1.3 million to cover this lost revenue and continued expenses while we lease up these communities. The goal of the BI adjustment is to restore the average net operating income that we had at these communities prior to the hurricane.

Both communities began admitting residents in July and are making good progress. The remainder of the decrease in our total consolidated revenue is due primarily to lower year-over-year occupancy.

Operating expenses, which include the BI credit, increased only $1.6 million or 2.1% in the third quarter of 2018 to $76.2 million. Our general and administrative expenses for the third quarter of 2018 were $5.6 million compared to $5.4 million in the third quarter of 2017. Due to a better health care claims experience and excluding transaction costs from both years, our G&A expense decreased $400,000 in the third quarter as compared to the third quarter 2017. And G&A expense as a percentage of revenue under management was 4% in the third quarter of 2018 compared to 4.3% in the third quarter of 2017.

Our adjusted EBITDAR was $36.1 million in the third quarter of '18 compared to $37.9 million in the third quarter of 2017. And our adjusted CFFO was $8.1 million in the third quarter of 2018 compared to $11.1 million in the third quarter of last year.

Looking at our same-community results. Same-community revenues decreased 0.8% as compared to the third quarter of 2017. We had a modest increase in average monthly rent of 0.6% year-over-year, while same-community occupancy was 130 basis points lower than the third quarter of 2017.

Our same-community expenses in the third quarter of 2018 increased 3.2%. Employee labor costs increased 2.8% in the third quarter of 2018 versus the third quarter of 2017. If you exclude the communities that have had conversion of units to higher levels of care, our employee labor costs actually increased only 2.1%. While our labor costs continue to increase at a reasonable level, as Brett noted, we do continue to see the effects of greater wage pressure in certain markets, particularly for caregivers.

We're currently addressing this at a select number of communities that have the most significant wage pressure, but we expect reductions in overtime and contract labor to cover most of the wage adjustments made, though the savings may slightly lag the investment. We're evaluating other markets where similar adjustments may need to be made in 2019.

Our food costs decreased 5% in the third quarter due to the newly centralized procurement platform that we implemented earlier this year, as Brett discussed in his remarks. The savings related to this initiative in the third quarter was approximately $500,000, which is in line with our expectations, and we expect this to increase in the quarters ahead due to the new initiatives that Brett noted in his remarks.

Our utilities, the other large operating cost in our expense structure, decreased 1.5% over the third quarter of last year. Same-community net operating income decreased 7.6% in the third quarter of 2018 as compared to the third quarter of 2017. Our financial occupancy for same communities was 85.6% in the third quarter, which was an increase of 10 basis points sequentially from the second quarter of 2018.

Looking briefly at the balance sheet. We ended the quarter with $22.7 million of cash and cash equivalents, including restricted cash. During the third quarter, we spent $7.2 million on capital expenditures. Our mortgage debt balance at September 30 was $950.3 million at a weighted average interest rate of approximately 4.8%. At September 30, all of our debt was at fixed interest rates except for 2 bridge loans that totaled approximately $76.3 million. The average duration of our debt is approximately 5.6 years, with 93% of our debt maturing in 2021 and after.

As we noted in our release, consistent with our normal business practices, we continue to look for ways to strengthen our financial foundation and optimize our asset portfolio. As part of this effort, we expect to close on a master credit facility by late December. The master credit facility will address all of our 2021 fixed debt maturities, which are nearest-term maturities, and a majority of our 2022 and 2023 maturities.

In addition to extending duration and eliminating interest rate risk on these nearest-term maturities, the transaction will result in net cash proceeds of approximately $20 million. We also expect to close on a supplemental loan on one community in the fourth quarter that will result in approximately $2.3 million of net cash proceeds.

Concurrently, we're planning to divest a limited number of assets in 2019, for which we expect to generate strong value. Due to the attractive long-term fundamentals for the industry, senior housing assets continue to be highly valued in the private marketplace.

The operating environment for seniors housing remains challenging, and we expect it to remain so through the fourth quarter and into 2019. While we continue to actively address the unique competitive conditions in each of our markets, month-to-month performance can be uneven. We had a 10 basis point increase in financial occupancy in the third quarter as compared to the second quarter. However, our September and October physical occupancy, which are key indicators for fourth quarter financial occupancy, were weak relative to historical patterns for those months.

As Brett noted, we're working diligently to control expenses and expect these efforts to have a positive impact on our fourth quarter results. We currently expect our full year 2018 adjusted CFFO to be at/or near the low end of the range that we previously communicated.

We are addressing competitive issues head-on and are committed to managing our expenses and providing excellent care and services to our residents. While there's more work to do, we continue to make progress on strengthening our platform and processes to enhance our execution and increase opportunities to drive growth going forward, and we're working diligently to position the company to take advantage of the coming turn in supply/demand metrics. We recognize the challenges ahead and are focused on building a stronger Capital Senior Living for the benefit of our shareholders and all of our stakeholders.

With that, I'll now open the call for questions.

(Operator Instructions) We'll take our first question from Joanna Gajuk with Bank of America.

So actually, on the last point, your comment around the guidance that you expect to be at the lower end of the prior range for the year. So how would you describe this quarter? What was the, I guess, negative surprise there? I mean, you said that you showed some improvement in metrics, but clearly, the pricing decelerated. The year-over-year increase decelerate to less than 1%. So can you just frame how the quarter shaped up versus your internal expectations?

Well, it was within our -- for the third quarter, it was within our range of expectations, Joanna. But the projections and what we would expect is really, it's really mostly about what level of occupancy we can achieve and at what rate. That's really what is -- are the big influencing factors. But as we go into the fourth quarter, we did. As the quarter went along, September and October were our weakest months from a physical occupancy standpoint, as I noted in my remarks, and those translate into fourth quarter financial occupancy. So that's really why we would expect to be at/or near that low end of the range that we previously communicated.

Right. So that's occupancy. And then on pricing, so can you talk about the discounting that has been taking place? Because I guess, on the Q2 call, you talked about 20% or so in some markets. So can you just frame what has happened since then?

Yes. So thanks for the question, Joanna, and we are being very selective in terms of how we're implementing discounting and concessions when we utilize them. It is a very competitive environment in many of our markets, as you've kind of heard across the industry. But we have a thoughtful review process in which every discount request is reviewed up through the Vice President of Operations and the VP of Sales. And if there's anything that is above what would be considered kind of our historical run rate, that's something that comes up to me and to Carey for review. So over the last couple of months, we've actually seen a reduction in the percentage in terms of overall percentage of discounting in our markets, down from 20% in some of our more hypercompetitive markets, down to an average of 13% to 15%. So we've seen some slowing. But as we've worked to preserve rate, you've also seen, and you heard Carey talk about some loss in occupancy in some of those markets, so we're working to really strike the balance between those 2. And we think we've found the right balance going forward now.

Great. And then on the flip side, right on the cost, so the labor cost growth of 2.8% was somewhat slightly better, I guess, than the 3.2% in Q2 on a same-store basis. So how would you characterize trends there? Are you seeing [increased] pressure? Or it's sort of as expected there in terms of the trend on all-in labor costs?

Joanna, this is Carey. And I'd say that we have been experiencing similar trends, and we would expect that similar trend to continue into the fourth quarter. We are seeing, as we both -- Brett and I both talked about in our remarks, some wage pressures beginning to increase in certain markets and we're looking to address that in some. But we do believe that reductions in overtime and contract labor are going to offset a lot of the adjustments that we think we need to make there. But we are -- we're aware of the wage pressure and are looking to address it. But it isn't impacting our labor cost at this point very much.

Yes, I think the biggest opportunity, as Carey mentioned, for to us to improve our expense base going forward is to drive down contract labor costs. We did a really good job of re-basing contract labor utilization this time last year. As wage pressure has become more pronounced in some of our markets, we have seen that start to creep up a bit again. And so these targeted investments that we're making, I think, will allow us to really balance that out and start to reduce those premium pay costs going forward.

And we'll take our next question from Chad Vanacore with Stifel.

I'm going to apologize because I hopped on right after your prepared remarks. But you mentioned more about the planned divestitures, you said limited number of assets. How many can we expect? And should we expect those to be stabilized assets or the underperforming group?

Yes. So Chad, the potential sale of assets are part of the normal ongoing optimization of our portfolio. We consistently review our assets and analyze the specific circumstances associated with each. I anticipate that we'll sell, as we said, a limited number of assets, this is not a large number of assets, some that we don't consider to be core to our portfolio as well as some that could generate significant proceeds that we could then reinvest in our communities and our people for the long-term success of the company. We don't have a specific number of assets that we're looking to sell, but it will be, as I said, a limited number, and there's no specific timetable for doing so. We're just looking to do that in 2019.

Okay. But 2019 is teed up there.

Yes.

What about -- you had mentioned adding some additional loans? Would -- are you comfortable adding leverage there? Or is there some kind of way to do this without adding to your already pretty high leverage?

Well, Chad, what we're really trying to do is to address those nearest-term maturities, 2021, and then most -- and the 2022s and '23s, to the extent we can because that's our nearest-term interest rate risk. And so we're looking to try to extend duration to do that. It also does give us some cash proceeds, which helps us to strengthen our financial foundation, which we do think is important. We are, on the flip side of that, through the asset sales, going to be taking some debt off of our balance sheet. So that's kind of moving the opposite direction there from a debt standpoint.

All right. And then as far as pricing on the debt goes, you have weighted average for the whole company at about 4.8%. Where do you anticipate the new loans?

Well, we'll have to wait and see. We haven't set the terms on that yet. But right now, the 10-year treasury is around 3.20%, and I'd say the rate would probably be somewhere between 5.25% and maybe a little higher than that, but right around that 5.25% kind of range is where I'd expect the 10-year to be, and that's -- so it'd be, on a historic basis, at a historically low rate. And the rising rate environment, we think, that's important.

All right. And then just on the expense side of things. That's really hampered your growth and margins have contracted a little bit. So what else do you plan on doing to control your expenses? Can you just give us a reminder there?

Yes. And you'll see some of this in the remarks, Chad. But there are additional optimizations that we're making in terms of our centralized procurement platform that will further optimize our supply spend as well as continue to gain efficiencies in our food spend through greater GPO utilization and some vendor changes. We also have a lot of additional opportunities around the regionalization and nationalization of contracts, mostly on the service side that we'll execute as we go into 2019. And then again, where we saw our biggest increases on the labor side was an uptick a bit in contract labor in our most competitive markets. So as we make these targeted investments in our people to get a more competitive wage, we anticipate that there's going to be a value proposition there as we exchange regular time, even if it's at a slightly higher rate for the premium cost that we're paying for contract labor today. And so we anticipate that will be a value generator as we go into 2019 as well.

So Brett, if I look at the same-store operating expense, you break out labor at plus 2.8% year-over-year. Did that include contract labor, or is that excluding it?

Yes. That excludes, but it does include premium pay. And so we're also seeing the effect of some of our labor shortages and pressure in overtime utilization and the like. And so again, we anticipate that there will be a reduction in those premium pay costs as well as we make these investments.

(Operator Instructions) And we'll take a follow-up question from Chad Vanacore with Stifel.

Okay. I figured since it looks like just me and Joanna here, then I might as well sneak in another question. So just thinking about rate growth here, given that you had previously discounted to kind of stabilize your occupancy, where are you as far as your discounts burning off? And where do you expect to be from now to the end of the year?

Yes. So for the most part, we've been utilizing very short-term concessions that burn off in a 30-day period. In our most competitive environments, we've done some discounting but at a much lower rate and kind of back to our historical levels. And we are going through a pricing exercise, essentially, to make sure that our market rates continue to be competitive in markets where we're seeing the most pressure. So again, we've spent a lot of time over the last few months putting in an even greater level of discipline to review each one of our markets in a very detailed fashion, look at the competitive environment, look at where we think our value proposition is, what our pricing strategy needs to be in those markets and not competing solely on price, but really competing on what our value is to the seniors that we serve. So we've seen a significant reduction over the last couple of months in terms of the amount of discounting that we've been doing. And so although we will continue to strategically use those tools in the fourth quarter, especially in our most competitive markets, I anticipate that it will maintain kind of at the levels where we've been.

(Operator Instructions) And seeing as we have no further questions at this time, I'd like to turn the call back over to Mr. Cohen for any additional or closing remarks.

Thank you. Thank you, all, for your interest in Capital Senior Living. Feel free to contact us if there are additional questions, and wish you a good afternoon. Thank you very much.

Once again, that does conclude today's conference. Thank you for your participation. You may now disconnect your phone lines.