Five Star Senior Living Inc.
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good morning, everyone, and welcome to the Five Star Senior Living Second Quarter 2017 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Brad Shepherd, Director of Investor Relations. Sir, you may begin.

[Brad Shepherd:]

Thank you. Welcome to the Five Star Senior Living's Call covering the second quarter 2017 results. The agenda for today's call includes a presentation by Bruce MacKey, President and CEO; Rick Doyle, CFO and Treasurer; and Scott Herzig, Chief Operating Officer. Following this presentation, the management team will open the floor to a question-and-answer session. I would like to note that 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 2, 2017. 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 statement. 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 Bruce.

[Bruce Mackey:]

Thanks, Brad, and thanks, everyone, for joining us on our Second Quarter Earnings Call. In the second quarter, [indiscernible] operating industry saw another record-high in number of new units opening up across the country. Consequently, we saw occupancy in our owned and leased portfolio drop to 83.1%, which is 120 basis points lower than one year ago and 50 basis points lower than last quarter; both of which correspond with the industry trends. Despite the decline in occupancy in the second quarter, we're able to increase monthly rate year-over-year and increase our ancillary business revenue producing flat Senior Living revenue year-over-year. We continue to omit our exposure to government reimbursed revenue sources, currently at just 22%, which is a positive in today's uncertain reimbursement rate environment. In July, we announced an expansion initiative in the rebranding of our rehab and wellness division. This expansion is a result of our recognition of the changing needs of our seniors and the growing desire for relocation services within Senior Living communities. We realized that many assuming communities are lacking this thought after amenity. With our experienced staff, national footprint and scalable platform, we can easily expand our relocation services outside of our own communities. While we're still in early stages of expansion, we're excited to offer our superior services in this niche market to more seniors across the country. Our rehab and wellness division now operates under the name of Ageility Physical Therapy Solutions and design agreements to service for communities outside of Five Star so far in 2017. Moving to our capital deployment activity in the second quarter; we spent approximately $20 million in CapEx this quarter, which is up slightly from last quarter for a year-to-date total of $38 million. On an annualized basis, this would trend about 38% higher than last year's total CapEx spend of $55 million. As has been the trend for the past three [ph] quarters, our largest dollar amount invested in the quarter was at our least CCRCs where we spent $9 million or 44% of our total CapEx for the quarter. One of the large initiatives and thus a large piece of the capital investment at our CCRCs, is the Rehab to Home program that we introduced last year and continue to talk about. We have recently completed a project at our Meadowood Campus in Bloomington Indiana. This community now has one of the nicest short term rehab units in the area. The unit actually had a grand opening last week which is very well-attended by our referral sources. We also completed a unit in the Scottsdale Arizona market and are waiting the state to approve our license to operate. We expect to complete a project in Ohio in the third quarter as well and are lining up additional projects that we will kick off in the second half of 2017. Since the launch of this initiative, we have opened almost 150 short term private rehab unit in seven communities. Moving on to some of our other larger capital improvement; in Texas last year, we started to convert 40 units of independent living to assisted living. This project is moving along and we expect to complete it in the second half of 2017. When finished, this will be one of the nicer assisted living units within the CCRC in the Dallas market. All these units will contain state-of-the-art amenities and the units will be larger than most of the assisted living units at our competition. Looking at our own portfolio now; in Indiana we are close to finishing a conversion of five communities with 450 independent living units to assisted living units. We expect two to be wrapped in the third quarter and the last three will be completed in the fourth quarter. These communities which have lost market share over the years through the growing need of assisted living in the area will now be better able to compete in a respective market giving the changing demand over the past several years. We also announced last week the completion of a multi-million dollar renovation of a TRS CCRC [ph] in Arlington Heights Illinois. We are wrapping up another renovation of a TRS CCRC in the Fort Myers Florida market an independent living TRS community in Dallas Texas. We continue to evaluate expansion projects to take advantage of opportunities in certain markets in finding growth internally. In the remainder of 2017, we expect to break ground on expansion projects at four communities

[Scott Herzig:]

Thank you, Bruce. As Bruce mentioned earlier, the second quarter proved to be a challenge with regards to growing occupancy as we continue to see new units come online in many of our markets. Total occupancy of the second quarter at our owned and leased communities was down 50 basis points sequentially and down a 120 basis points from a year ago. On the plus side, we continue to trend from last quarter where we were able to move in more new residents each month in the same time period last year. Year-to-date we have moved in 5% more residents than last year on the same-store basis and we moved in 175 more residents in the second quarter of this year compared to the second quarter of last year, up 7%. Unfortunately, our attrition exceeded moving and were impacted by the lingering effects of the flu which was similar to Q1. Our ongoing revenue management efforts allowed us to compete better with the influx of new competition with only a minor impact to our daily rate, which was down slightly, sequentially this quarter. We were also pleased to see that resident referrals continues to be our number one referral stores as this is a clear indicator of a high level of resident satisfaction. While growing occupancy remains our number one priority, our clinical excellence were showcased at many of our locations across the country in the second quarter, specifically as it relates to 15 of our communities being recognized by the American Healthcare Association with Bronze awards for quality and an additional three more locations recognized with the prestigious Silver award for quality. We now operate 62 locations honored with the Bronze award and 10 others that have been recognized with the Silver award. In addition to these prestigious awards for quality, I am also proud to report that for the first time, more than 80% of our skilled nursing units are rated as three stars or above by the Centers for Medicare and Medicaid Services or CMS, which is a key qualifier for participation with most managed care and accountable care organization. It also strengthens our ability to create strategic partnerships with individual hospital system. We are very proud of all these communities and congratulate them for their prestigious accomplishment. Turning now to our rehab and wellness division. As Bruce mentioned earlier, we have rebranded this division and it is now called Ageility Physical Therapy Solution. While accounting for just 2% of our gross revenues, this division produced $5.6 million in ancillary revenues for the second quarter, which is up 12.3% from the prior year. We opened four new outpatient rehab clinics during the second quarter, bringing our total number of outpatient clinics to 85. As I mentioned on our last call, our goal in 2017 was to expand our outpatient rehab expertise outside of the Five Star footprint and to that end, I am pleased to announce that we have signed four new non-Five Star contracts for outpatient rehabilitation services. Two of these contracts are in Florida - one is in Arizona and one is in Nevada. All of which fall into our geographic areas where we already have an outpatient present. Two of these clinics are already up and operating and the other two should be open during the third quarter. We are pleased with the pace of our expansion for the Ageility division and will continue to look to add new business both inside and outside the Five Star space over the instituting quarters. Before I turn the call over to Rick, I would like to provide a couple of other update on two of the larger initiatives that we have ongoing in 2017 - our electronic medical records conversion project and our rising star program. With regards to our electronic medical records initiative, we are on schedule and continue to convert all of our skilled nursing units at our CCRCs and our free standing skilled facilities to the PointClickCare product. As a reminder, being electronic with our medical records allows us to more easily share out outcomes with key referral sources, improves communications with physicians, reduces medication and transcription errors and is vital to participation in all of the organized healthcare programs. Our plan is to be fully electronic with our medical records and all of our CCRCs and free standing skilled nursing communities by the end of 2017. I will keep you updated on our progress on subsequent earnings call. Last quarter we also talked about our program to cultivate new executive directors at the community level, branded as our Rising Star program. Executive Directors are the difference makers in operating a successful building and we currently have six outstanding individuals going through the program - a couple of whom are ready to sit for their state exam. We are currently in the process of hiring another [indiscernible] to take their place in the training curriculum and have had a tremendous amount of interest in being chosen for this training. In fact, we have had more than 1,000 applicants. Both internal and external applied for this tremendous opportunity. We are pleased with our progress in building bench strength in this pivotal position and will continue to introduce new individuals regularly. Every day our operations team focuses on initiatives designed to strengthen and improve our business. Equally as important as everything I just mentioned, we continue to create industry-leading programs and improve resident satisfaction which arguably makes Five Star the best Senior Living operator in the industry. I will now turn the call over to Rick Doyle, our Chief Financial Officer.

[Richard Doyle:]

Thanks, Scott, and good morning, everyone. For the second quarter 2017, our Senior Living revenue of $279 million was flat compared to the same period in 2016, primarily due to the increase of 1.2% in our average monthly rates in our leasing of two additional communities in the fourth quarter of 2016, offset by the decrease in occupancy of 121 basis points year-over-year. Our management fee revenue was $3.6 million for the second quarter, an increase of 26% compared to the same quarter last year. This increase is due to the six new managed communities we now operate in the increase in the base management fee as certain of our managed community since July 1, 2016. Senior Living wages and benefits for the quarter were $135 million or 48.3% of Senior Living revenue. This was a 1% or $1.2 million decrease compared to the same period in 2016. Although salaries increased 2% year-over-year, we experienced a decrease in our health insurance and worker's compensation insurance programs. Other Senior Living operating expenses for the quarter were $75 million or 26.7% of Senior Living revenue. This is an increase of approximately $2.7 million compared to the same period in 2016. The increase was due to the implementation of our electronic medical records initiative which we expense approximately $800,000 on the second quarter. We expect to incur similar class in the third and fourth quarters of 2017 as we complete the implementation. We also recorded a $500,000 benefit in the second quarter of 2016 related to the final settlement at one of our skilled nursing facilities creating an unfavorable comparison year-over-year. And finally, we continue to keep our communities marketable, we've incurred higher repairs and maintenance to expense in the second quarter compared to the same period in 2016. General and administrative expenses were at $90 million for the second quarter, an increase of approximately 10% compared to the same period last year. Included in G&A is $500,000 of cost related to the implementation of our new ERP system. Rent expense for the quarter was $52 million, an increase of 2.8% compared to the same period last year and 18% of our Senior Living revenue. The increase primarily relates to our leasing of nine additional communities since July 2016 as well as the additional rent related to capital improvements made to our lease communities since July 2016. Interest expense for the second quarter was $1.1 million, a decrease of 28% compared to the same period last year due to the decreased borrowings under our credit facility. In the second quarter 2017, we recognized a benefit from income tax as a $1.4 million due to monetizing alternative minimum tax credits. We report a loss from continuing operations of $0.13 per share compared to a loss from continuing operations of $0.15 per share for the same period in 2016. Adjusted EBITDA for the second quarter 2017 was $3 million. Turning now to our liquidity, cash flows and selected balance sheet items. At June 30, we had $7.2 million of cash and cash equivalent in no borrowings outstanding on our $100 million revolving credit facility. The credit facility is secured by 10 of owned Senior Living communities at quarter and we had $351 million of net property and equipment which includes 26 communities directly owned by Five Star, six of which are incumbent by mortgage debt. The carrying value of these mortgages is approximately $59 million with a weighted average annual interest rate of 6.3% and a weighted average term of six shares. Our leverage was 28% of total book capital and 12% of total assets. We believe that we are in compliance with all material terms of our credit facility and mortgage agreements. With that, I will turn the call back to Bruce for closing remarks.

[Bruce Mackey:]

Thanks, Rick. While we are encouraged with the absorption year-to-date, the consistent influx of new inventory is [indiscernible] discouraging. Rest assured, we are now taking a declining occupancy and the corresponding decline in our share price widely. Operation will be concentrated on our six profitability initiative each and every day and battles to turn the downward trend. On a public equity side, we faced challenges almost as daunting as our operational hurdle. As our equity market cap has fallen below the $100 million, the size over the pool for potential investors has reduced with it due to liquidity constrains. However, we continue to get off the market and tell our story with investors. Our balance sheet remains strong, we are investing in and positioning your properties to remain competitive and our programming, services and most importantly, our people are among the best the industry has to offer. I will now turn it back over to our operator for question.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brian Tanquilut from Jefferies. Please go ahead with your question.

[Jason Plagman:]

Hey, guys. It's Jason Plagman in for Brian. First question, your rent growth slowed a little bit this quarter about 1% versus 2% to 3% in Q1. Can you just talk about the trends that you're seeing in pricing and discounting and how you see your outlook for the second half as far as pricing growth?

[Bruce Mackey:]

Sure. This is Bruce. We saw probably a little bit more discounting in the second quarter than in the first quarter. I think it helped on our moving said as Scott; that are moving quarter-over-quarter were up which is a positive, but it's a tough market; with all the new things coming online we've got to be competitive, more of our communities using our dynamic pricing program so we are being selective with rates. I think you'll probably see that continue a little bit in Q3 and Q4 in all honesty.

[Jason Plagman:]

Okay, that is helpful. And then as far as the monthly progression throughout the quarter, did you see the usual seasonal uptake in occupancy or improvement later in Q2? Even if you can comment in the June and July along what you saw as far as eye couldn't see.

[Scott Herzig:]

Sure. This is Scott. I talked about it in the script. We did have a good six months. Our moving numbers were relatively strong when you compare them to last year. We definitely have seasonality built in there, but we are able to overcome a lot of that. We did have some issues with the flu that spilled into the second quarter. But we were aggressive with our move ins, with our pricing and we are happy of what we saw in the first six months of the year. July has a little seasonality built into it in the Florida, Arizona and some in Texas. It wasn't quite as strong as the previous six months, but we still had some decent numbers.

[Bruce Mackey:]

And if you look back historically too, we definitely pick up on August and September. Those have been usually good moving months for us.

[Jason Plagman:]

That's helpful. As far as just the CRC segment, the occupancy was particularly weaker than the other groups. Any factors that you call out there that affected that segment?

[Scott Herzig:]

Yes. Mostly on the CCRC side, you saw decline on me on the skilled side of the house. It's not unusual, given what we've seen over the last couple of years with the skilled occupancy. We typically don't have very much at all on the way of Medicaid, in our CCRC skilled side of the house, so our numbers are a little bit tougher to compare to, but we definitely had some drops in our Medicare-eligible residents over the last quarter.

[Bruce Mackey:]

And if we look at our program, what we've gone on that side with the Rehab to Home, on that end are putting an electronic medical records boosting our affiliations of ACO. So again, we try and get up there and capture that market's base.

[Jason Plagman:]

And then just following up on the Rehab to Home initiative, your queue to that program now. Can you talk about some of the details, provide some details on the improvement you've seen in occupancy or rent growth from those projects that have been completed?

[Scott Herzig:]

This is Scott. On the Rehab to Home, our goal there is to go after a higher and shorter term rehab residence. Every place that we put those units in the place, we've seen an increase with our client base, target audience there. Our [indiscernible] are much shorter when we use those, but our reimbursement, we definitely hit some higher rug levels when we install those units because of the type of patients we're able to get. So they've been successful for us. If we didn't upgrade and put in those beautiful sweets that we have in place, we would be so far behind the eight ball on the skilled side of the house. So they have definitely helped us be competitive, especially when you consider that many people in the CCRC side of the business come into our communities, knowing that they at some point will be in the skilled side of the house. They're great marketing tools as well.

[Bruce Mackey:]

And two of those communities, too, we actually took out Medicaid units and replaced them with Medicare patients. And the rate per day difference on those two are pretty significant.

[Scott Herzig:]

And again, that's why we keep talking about the electronic medical records. That, too, will help us to compete and to get part of the managed care organizations that are taking a lot of the traditional part A [ph] residents right now.

[Bruce Mackey:]

I think long term, you'll probably see a lot of the traditional sniff [ph] units to some extent go away. I think the units that we're positioning right now for Rehab to Home is you're looking to future in this industry are really going to be competitive going forward.

[Jason Plagman:]

That's all for me. Thanks, guys.

[Bruce Mackey:]

Great, thank you.

[Operator:]

And ladies and gentlemen, at this time it's showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

[Bruce Mackey:]

Great. Thank you, Jimmy. I'd like to thank everyone for joining us on our second quarter earnings call and we look forward to updating you on our progress on future calls. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your line.