Five Star Senior Living Inc.
Q2 2019 Earnings Call Transcript

Published: 7 Aug 2019

[Operator:]

Good morning and welcome to the Five Star Senior Living Second Quarter 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 2019 results. The agenda for today’s call includes a presentation by Katie Potter, President and CEO; and Jeff Leer, Executive Vice President, CFO and Treasurer. Following this presentation, the management team will open the floor to a question-and-answer session with research analysts. I would like to note that the transcription, recording and retransmission of today’s conference call is strictly prohibited without the prior written consent of Five Star.Today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Five Star’s present beliefs and expectations as of today, Wednesday, August 7, 2019. The company undertakes no obligation to revise or publicly release the results of any revisions 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 and adjusted EBITDA. Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate EBITDA and adjusted EBITDA are in our quarterly news release available on our website at www.fivestarseniorliving.comActual 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 within 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 earnings call. First and foremost, I’m excited to announce the appointment of Margaret Wigglesworth as Senior Vice President and Chief Operating Officer, effective August 12, 2019. Margaret is a great example of Five Star’s recommitment to investing in its team members. She is an experienced leader with a proven track record for delivering results. Margaret is uniquely qualified to drive strategic prioritization and accountability within Five Star to achieve operational excellence. She joins an energetic and motivated team at the ideal time to capitalize on a number of opportunities as the senior living industry evolves. We are eager for her to begin next week.I’m also happy to announce that there is no longer doubt that Five Star Senior Living will continue as a going concern. In addition, Five Star reported net income of $4.2 million, the company’s first quarterly profit since the second quarter of 2013. On April 1, 2019, we entered into a transaction agreement with SNH to modify our existing business arrangements, including terminating the leases for all senior living communities we leased from SNH and replacing those leases with new management agreements.The management agreements for all senior living communities we currently manage on behalf of SNH will also be terminated and replaced with new management agreements. In addition to terminating the SNH leases and entering into the new management agreements, we have executed several financial transactions with SNH that have improved our financial position and provided us with a source of liquidity.First, fixed-rent payments under the SNH leases have been reduced from $17.4 million to approximately $11 million per month, effective February 1, 2019. The second quarter of 2019 reflected a full-period effect of this rent reduction. Second, when we entered into the transaction agreement, SNH purchased the majority of the property, plant and equipment related to the SNH-leased communities for approximately $50 million, the equivalent of those assets’ depreciated book value. Any capital improvements made at the leased communities during the transition period April 1, 2019, to January 1, 2020 are being funded by SNH.Third, SNH provided us with a $25 million credit facility secured by stakes of our own communities. This credit facility was intended to provide us liquidity while we work to refinance, extend or replace our prior credit facility. On June 12, 2019, we entered into a second amended and restated credit facility pursuant to which we now have a $65 million secured line of credit. Also on June 12, 2019, we reached an important milestone in completing our transaction with SNH.Five Star shareholders voted overwhelmingly in favor of issuing Five Star common stock to SNH and its shareholders in satisfaction of one of the conditions to restructuring Five Star’s business arrangements with SNH. In addition, appropriate system, process and organizational changes necessary to complete the transaction on time are well underway, and we remain on target for the January 1, 2020, conversion.Now I’d like to address our senior living operational performance for the quarter. In the second quarter, we reported total occupancy of 83%, which was up 160 basis points compared to the same quarter last year and up 10 basis points sequentially. Average monthly rate for all our communities leased and owned marginally increased year-over-year. The combination of increased occupancy and average rate resulted in an increase in our senior living revenue for the fourth consecutive quarter and an increase in comparable community senior living revenue of 3.2% compared to the same quarter last year.As mentioned previously, the second quarter of 2019 marks the first quarter of positive operating income since the second quarter of 2013. While expenses remained elevated this quarter, this was largely by design as the result of our commitment to investing in our team members. Consequently, total wages and benefits were up 3.2% compared to the same period last year.Part of the commitment to retain and motivate our workforce includes recognition through compensation. Accordingly, we invested in our team members through increases in base pay and are already benefiting from this investment through talented new hires. For example, in the quarter, we hired 19 new executive directors at our communities. We want to continue to attract and retain the best talent. And we intend to do so by providing them the tools necessary to be successful; recognizing and rewarding those successes; and building a culture of accountability, transparency and innovation.In addition, we hired a new director of employee engagement, completed our first comprehensive employee engagement survey, launched a new employee recognition program and are proceeding toward implementing a learning management system, all of which reaffirm our commitment to our team members.Ageility Physical Therapy Solutions, our rehabilitation and wellness division, continued to reap gains in the second quarter. Revenues reported were $11.1 million, which is a 27% increase compared to the second quarter of last year. So an additional five new clinics opened in the second quarter. And on balance, new clinic startups continue to show good cadence, on target for our annual projection of 30 new clinics in 2019.Opportunities for growth in 55-plus communities were realized in the second quarter, and as a result, Ageility has expanded its target market. In light of these opportunities, Ageility is also evaluating growth potential and fitness offerings for older adults.Before I turn the call over to Jeff, I’d like to give an update to the progress on our key senior living operational initiatives and our collaborations with the MIT AgeLab and with the National Senior Games Association’s. We continue to focus on providing an exceptional resident experience in our communities through our partnership with J.D. Power and Associates with respect to their senior living community certification program.I’m proud to report that, as of last week, Five Star has 22 communities in five states that have received the J.D. Power senior living certification, adding 17 communities in the quarter. While our goal is to continue to add to the number of Five Star communities that receive this valued certification, our primary focus is to continue to drive operational excellence consistent with the over 170 J.D. Power operational best practices.While focused on delivering an exceptional experience to our current residents and clients, Five Star continues to believe it can have a true and lasting impact on all older adults regardless of where they call home. Starting with Ageility

[Jeff Leer:]

Thank you, Katie. Earlier this morning, we reported net income of $4.2 million for the second quarter of 2019. As compared to the second quarter of 2018, net income increased approximately $25.1 million primarily driven by the impact of the transaction agreement with SNH, which reduced monthly rent rates, as well as declines in depreciation expense attributable to the purchase of almost $50 million worth of fixed assets in April 2019.On an adjusted EBITDA basis, we reported $8.6 million, which excludes a $1.1 million adjustment for transaction costs and almost $400,000 of severance cost associated with a former executive officer.Senior living revenue for the second quarter of 2019 was approximately $274.5 million, an increase of $3.6 million or an increase of 1.3% compared to the same period last year. And comparable community senior living revenue was up $8.4 million or 3.2%, which was driven primarily by modest increases in occupancy and average monthly rates. We also experienced a revenue growth in our Ageility services and expect to continue on this trajectory throughout the remainder of the year.Senior living wages and benefits increased 3.2% year-over-year to $145.2 million, which is approximately 53% of senior living revenue. And on a comparable community basis, senior living wages and benefits were up 5.3%. This quarter’s increase in wages and benefits is due to the combination of increases in standard pay attributable to our continued focus to invest in our team members, in addition to contract labor costs to support the transition of certain communities to other operators.Other senior living operating expenses for the quarter were $72.6 million, a decrease of 4.2% from the second quarter last year. On a comparable community basis, other operating expenses decreased approximately $800,000 or 1% compared to the same period last year.General and administrative expenses were $20.5 million for the second quarter and included $1.1 million of transaction costs incurred with the connection with the transaction agreement with SNH as well as $600,000 related to strategic sourcing investments and $400,000 related to executive severance.Excluding these costs, general and administrative expenses were $18.4 million, which is roughly in line with the same quarter last year. Interest expense for the second quarter was $900,000, an increase of 50% compared to the same period last year due to increased borrowings on our credit facility.At June 30, we had $35.5 million of cash and cash equivalents. During the quarter, SNH purchased almost $56.3 million of fixed assets and improvements from us related to the leased senior living communities and which a majority of the proceeds were used to pay off outstanding balances on our revolving line of credit. As of today, we do not have any borrowings outstanding on either the new credit facility nor the SNH line of credit.With that, I will turn the call back to Katie for closing remarks.

[Katie Potter:]

Thanks, Jeff. 2019 continues to be a transformational year for Five Star. While the restructuring of our business arrangements with SNH is a long-term solution to our financial challenges, it is only the first step in our transformation. We continue to reinvest in our team members; and further strengthen our partnerships with J.D. Power, the MIT AgeLab and the National Senior Games. We continue to build on our momentum in operational excellence; and providing an exceptional resident, client and team member experience; as well as evolving our service offerings to meet the changing needs of older adults.With the addition of our new COO, I am confident in our ability to continue to make great progress toward our initiatives while securing financial stability for future.I will now turn the call back over to our operator for questions.

[Operator:]

There are no questions at this time. This concludes our question-and-answer session and also today’s conference call. Thank you for attending today’s presentation. You may now disconnect.