Five Star Senior Living Inc.
Q2 2020 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to the Five Star Senior Living Second 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 Michael Kodesch, Director of Investor Relations. Please go ahead.
- Michael Kodesch:
- Thank you. Welcome to Five Star Senior Living's call covering the second quarter 2020 results. The agenda for today's call includes a presentation by Katie Potter, President and CEO; Jeff Leer, Executive Vice President, CFO and Treasurer; and Margaret Wigglesworth, Senior Vice President and COO. 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 or 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, Thursday, August 6, 2020. 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. In addition, this call may contain non-GAAP numbers, including EBITDA, adjusted EBITDA and pro forma EBITDA. Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate EBITDA, adjusted EBITDA and pro forma EBITDA are in our quarterly news release available on our website at www.fivestarseniorliving.com. 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.
- Katie Potter:
- Thanks, Michael, and thanks, everyone, for joining us on our Second Quarter 2020 Earnings Call. Following the completion of our restructuring transaction with DHC, Five Star has made great progress in both driving comprehensive change across the organization as well as providing a path to sustainable long-term growth. For the second quarter of 2020, our adjusted EBITDA was $7.1 million. We had net income of $0.10 per diluted share, and we had over $76 million of unrestricted cash and limited debt on our balance sheet as of June 30th. This strong financial position equips us with greater flexibility as we navigate the challenges presented by COVID-19, helps us to continue optimizing senior living operations, provides capital for investment within our owned and leased portfolio and allows us to pursue external growth opportunities through complementary service offerings like our rehabilitation and wellness services. Throughout this remarkably challenging pandemic, I am reminded daily of how resilient and goal oriented our organization has become. Since the start of the crisis, I have seen our team members striving every day to do the right thing for others, and I want to thank them for their dedication to safeguarding the health and well-being of not only our residents and clients, but of each other and their families as well. In uncharted periods, such as the one we find ourselves in now, we must invoke our mission statement and values to help us navigate through these adverse conditions and deliver an exceptional resident, client and team member experience. As our understanding of the pandemic develops, Five Star continues to refine and supplement our operations with enhanced protocols and procedures and precautionary measures throughout our communities and clinics. Initially, our COVID-19 task force was instrumental in ensuring that our team members called on their extensive preparation and training in infection, prevention and control practices to respond to this health crisis before it began in earnest. As of today, this task force continues to facilitate open and direct lines of communication between all levels of community leadership and frontline health care practitioners and caregivers. In addition, it serves as a conduit between our communities and our corporate support functions to ensure availability of resources and supplies to our communities, including the availability of personal protective equipment, or PPE. We continue to closely follow recommendations provided by the CDC in addition to federal, state and local regulatory authorities, and incorporate them into our already comprehensive policies, procedures and protocols. Proactive testing and contact tracing has become paramount to ongoing operations as these monitoring techniques help advise critical decision-making when it comes to move-ins, activities programming, dining and many other aspects of the resident client and team member experience. Over the past 2.5 months, Five Star has conducted community-wide baseline testing at every assisted living, memory care and skilled nursing community Five Star owns, operates and manages. Five Star has proactively partnered with other health care service providers to support our proactive testing program. As part of this program, every community with a confirmed case of COVID-19 conducts weekly testing until there are no new cases of COVID for a minimum of 14 days. This approach supports our ability to identify new cases, particularly in circumstances where those new cases were asymptomatic, conducts contact tracing and isolate positive cases to significantly mitigate any further spread of the virus. Five Star will continue to monitor new advancements in testing, the efficacy of new protocols and potentially pilot new approaches that show promise in improving our ability to proactively detect and prevent COVID-19 in our communities and clinics. The pandemic continues to impact our country as well as our communities and clinics. We have recognized the importance of adjusting the way we operate and adapting to life under a new normal. As Margaret will discuss, when the economy began reopening in various states, five Star devised thoughtful, phased approach for easing of restrictions, where appropriate, and certain of our communities have begun the reopening process. Now I'd like to provide an update on our key number initiatives and our Rehabilitation and Wellness Services division. As evidenced by the challenges of COVID-19, the focus on our team members, our most important asset, is critical to our mission as an organization. As such, it is vital that we continue to provide our team members with the resources necessary to succeed in the current environment. This includes regular company-wide town halls, a COVID-19 resource website as well as periodic news digest, weekly webinars, online forums for collaboration and discussion and regular virtual meetings with and tours of the communities to allow community, clinics and corporate teams to stay connected. Monthly employee recognition and rewards programs have continued, and been enhanced for those members of our team that continue to go above and beyond. Our team member-focused initiatives continue to build traction and have resulted in further improvements to company-wide team member turnover. Overall, annualized turnover is approximately 55% for the 6 months ended June 30, 2020, which represents a decline of roughly 600 basis points from the 61% annual turnover experienced in 2019. This year, we have hired 6620 new team members, including 35 new executive directors and 5 new regional directors. While our initiative to bolster our labor force has been complicated by the pandemic, we continue to make strategic new hires, both in our communities and clinics and in our corporate team. We do expect turnover to increase as a result of the nature of this pandemic. However, we are encouraged by the level of interest of prospective team members who wish to serve our residents and clients and also pursue exciting and rewarding career opportunities at Five Star. Ageility, a part of our rehabilitation and wellness division continues to be a focal point of growth, as it not only provides diversification to our revenue streams in such a challenging environment, but also acts as a critical touch point to improve the experience of our current residents and clients as well as help us source new residents to our communities. Despite the restrictions put in place to mitigate the spread of COVID-19, while significantly impacted our ability to open new rehabilitation and wellness clinics in the quarter, Ageility successfully opened two net new clinics, bringing our total inpatient and outpatient clinics to 246. In addition, many of our residents have experienced a decline in mobility and overall physical deconditioning due to isolation and quarantine necessary as a result of COVID-19 and associated restrictions. In response, our Ageility teams are finding new and innovative ways to treat our residents and clients who need therapy and physical fitness services now more than ever. Total Ageility therapy outpatient visits were up 0.8% sequentially. And on a visits per clinic basis, we showed slight improvement over the previous quarter. Now I'd like to turn the call over to Margaret, who will address our senior living operations in the quarter.
- Margaret Wigglesworth:
- Thanks, Katie. I'd like to begin with an update on the COVID-19 environment. As of August 1, approximately 4.6% of our resident population has tested positive for COVID-19. Of these confirmed resident cases, roughly 43% of the residents have since recovered from the virus as defined by the CDC guidelines. Generally, we have seen concentrations of cases similar to those which the CDC has highlighted as areas significantly impacted by the virus. As of August 1, 7 states represent more than half of our cases and include
- Jeff Leer:
- Thank you, Margaret. Before diving into the financial results, I would like to highlight our continued efforts to enhance our disclosures to provide additional transparency of our business following the completion of the transaction with DHC. These changes include an assortment of Rehabilitation and Wellness Services metrics, further detail regarding COVID-19 reopening phases, the inclusion of 5 quarters of pro forma EBITDA and adjusted EBITDA, detail regarding our recurring investment in CapEx and more disclosures surrounding adjusted cash flows, all of which can be found within our investor presentation, which will be furnished in a current report on Form 8-K filed with the SEC following today's call. Additionally, in the press release published this morning, we provided a pro forma view of the second quarter of 2019 as if the transaction with DHC had closed on January 1, 2019, to better represent a comparison of this quarter's results. Earlier this morning, we reported net income of $3 million or $0.10 per diluted share for the second quarter of 2020 compared to $4.2 million or $0.81 per diluted share recorded in the same period last year. As Katie mentioned previously, adjusted EBITDA this quarter was $7.1 million, which is a $1.6 million decline from the $8.7 million reported in the prior year quarter. In addition, this represents a decrease of approximately $2.7 million from the pro forma adjusted EBITDA of $9.8 million recorded in the second quarter of 2019. We reported total revenues and other operating income of $286.6 million in the second quarter of 2020, which represents a 7.8% decrease from the pro forma prior year quarter, largely due to the effects of dispositions that occurred throughout 2019 and in April 2020, compounded by the impacts of COVID-19. On a comparable community basis, management and operating revenues increased $4.5 million, or 12.7%, driven by growth in our Rehabilitation and Wellness Services segment revenues, primarily attributable to growth in Ageility. Our Rehabilitation and Wellness Services segment reported revenues of $19.3 million, of which Ageility comprised of $18.9 million, which is a $1.1 million or 5.6% increase compared to $18.2 million on a pro forma basis. As a reminder, under our new management contracts, we earn a construction management fee of 3% of DHC's investment in capital projects we manage on their behalf. Construction management fees were approximately $444,000, which was flat to last quarter due to construction projects that were delayed or canceled as a result of restrictions placed in our communities in addition to more closely manageable liquidity needs in response to the financial impacts of COVID-19. We expect the impact of restrictions will continue to affect our ability to execute our capital management program throughout the remainder of the year. Now turning to expenses. We incurred $285.2 million of total expenses in the quarter, which was down 6.3% from the second quarter 2019 results on a pro forma basis. During the second quarter, we were able to effectively manage expenses, including balancing our labor needs with the deterioration of our occupancy in addition to reductions in both food and repair and maintenance costs. As certain states ease restrictions, we anticipate incurring costs associated with certain necessary repairs and maintenance projects, which will impact the savings benefits we have been able to achieve. General and administrative expenses were $23.6 million for the second quarter and included $6.4 million of G&A reimbursed by DHC that represents certain centralized functions that directly support managed community operations. Excluding reimbursed costs of $6.4 million, general and administrative expenses were $17.2 million as compared to $16.2 million pro forma June 30, 2019 results. G&A includes approximately $460,000 of nonrecurring expenses attributable to licensing and regulatory matters in connection with the transaction with DHC as well as costs attributable to our corporate team realignment to support our senior living communities and strategic initiatives. Interest expense for the second quarter was $409,000 due to the costs associated with the unused capacity on our revolving credit facility. Year-to-date, we have spent approximately $36.4 million of capital expenditures at our managed senior living communities. Our partner, DHC, has announced the plan to continue to invest in essential capital, but certain projects have been delayed and may continue to be delayed in the future due to community access restrictions and other state and local ordinances related to COVID-19. As a result, we are now budgeting roughly $100 million of CapEx spend in the communities we manage on behalf of DHC for the full year 2020. Additionally, in the second quarter, we invested $1.1 million of capital comprised of $600,000 invested capital at our owned and leased portfolio, $35,000 in our Rehabilitation and Wellness Services segment and $483,000 in investments in our corporate support functions to better support our long-term strategy. Moving to our balance sheet. DHC paid the remaining portion of the $75 million of consideration in exchange for the shares issued as part of the restructuring transaction, of which $51.5 million was settled as of March 31 in the form of an assumption of certain working capital liabilities, and $23.5 million was settled during the second quarter in cash. Additionally, approximately $13 million of DHC's remaining transaction-related net liabilities were reimbursed to Five Star in the form of cash. As a result, as of June 30, we had approximately $76.1 million of cash and cash equivalents and $7.4 million of outstanding debt obligations. Our cash balance includes approximately $4.7 million in CARES Act relief funds, primarily related to facilities that were previously leased by us from DHC during 2018 and 2019, for which we are evaluating our eligibility to retain these funds. In the event we determined we are not eligible to retain the funds received, we will remit the funds to Department of Health and Human Services. Adjusting for this, our pro forma cash balance is closer to $71.4 million. As of today, we do not have any borrowings outstanding on our credit facility. With that, I will turn the call back to Katie for closing remarks.
- Katie Potter:
- Thanks, Jeff. The health and well-being of our residents, clients and team members remains our #1 priority. As we continue to learn more about COVID-19, I am confident in our ability to adapt to the risks posed by the pandemic, and enact the necessary protocols to maintain an exceptional resident, client and team member experience. As we continue to make strategic investments across our platform, we believe Five Star will maintain financial stability for the future and be well positioned to maximize value for shareholders. I will now turn the call back over to our operator for questions.
- Operator:
- And seeing as there are no questions, this will conclude today's question-and-answer session as well as the conference. Thank you for attending today's presentation and you may now disconnect.
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