Five Star Senior Living Inc.
Q3 2017 Earnings Call Transcript

Published: 12 Nov 2017

[Operator:]

Good morning, and welcome to the Five Star Senior Living Third Quarter 2017 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Brad Shepherd, Director of Investor Relations. Please go ahead, sir.

[Brad Shepherd:]

Thank you. Welcome to Five Star Senior Living's call covering the third 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 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, Thursday, November 9, 2017. The company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements made in today's conference call other than through the 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. I will now turn the call over to Bruce.

[Bruce Mackey:]

Thanks, Brad. And thanks, everyone, for joining us on our third quarter earnings call. I want to start the call by thanking all of the Five Star team members that went above and beyond the call of duty, taking care of our residents during the hurricanes this past quarter. We had three communities impacted by Hurricane Harvey in Texas and over 20 communities in Florida and Georgia impacted by Hurricane Irma. We had hundreds of staff that worked in our communities, serving our residents for up to 3 or 4 straight days while not knowing if their own homes were damaged or not. The complimentary letters I got from residents and family members, thanking me for how well they were taken care of during the storms, were extremely touching and made me enormously proud of our team. I'm thankful to report that all of our communities fared the storms relatively well with little damage. Earlier today, along with our financial results, we announced that we have entered into an agreement to sell 6 senior living communities to Senior Housing Properties Trust or SNH. The aggregate sales price of these 6 senior living communities will be $104 million, which includes $34 million of mortgage debt that SNH will assume. Simultaneous to this transaction, we will enter long-term management agreements with SNH to manage these senior living communities for a management fee of 5% of gross revenues. The 6 communities are located in Alabama, Arizona, Indiana and 3 in Tennessee and contain an aggregate of approximately 600 units. The completion of the sale gives us access to capital by realizing a portion of our owned portfolio's value and further reduces our long-term mortgage debt balance. We intend to use the proceeds from the sale/manage-back transaction for general business purposes, including future capital investments in our remaining leased and owned communities. Now turning to our operational results for the quarter. Total senior living revenue in the third quarter was up slightly both sequentially and year-over-year. Year-over-year, total independent assisted living and memory care revenue was up over $1.6 million and was offset by a decrease in skilled nursing revenues of approximately $1 million. The majority of the decrease in skilled nursing revenue can be attributed to the skilled nursing operations at our larger CCRCs. As we have mentioned in the past, we generally do not accept Medicaid for skilled nursing care at our CCRCs, and that can limit our ability to drive occupancy numbers in this line of business. We are also seeing a shift towards more managed care and growth in accountable care organizations. To meet the shifts in the industry, some of our CCRCs have rent-up renovations, and we have invested in electronic medical record systems to participate more in managed and accountable care networks. We believe that this approach will help grow occupancy and revenue in this line of business in an otherwise challenging environment of skilled nursing care. In addition, we believe there's still value in our skilled nursing operations at our CCRCs as they help drive business to our other private pay services provided at these communities. Adjusted EBITDA for the third quarter of 2017 was $3.3 million. This is down from $4.3 million for the same period last year, primarily due to the drop in occupancy that the industry has been experiencing. However, adjusted EBITDA is up 9.5% sequentially from the same quarter of 2017. Moving to our capital deployment activity in the third quarter. We spent approximately $17 million in capital expenditures in the third quarter for a year-to-date total of $55 million. As has been the trend this year, our largest dollar amount invested in the quarter was at our leased CCRCs where we spent $8.5 million. 67% or $11.4 million of the CapEx spent in the third quarter was funded by our landlord, SNH, for use at our leased 4 properties for a total of 56% funded or $31 million year-to-date. One of the larger 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 a managed community in the Scottsdale, Arizona market. The unit had a grand opening in October, which was very well attended by referral sources. We also just completed a large renovation at a managed community in the Dallas market last month as well. This is a high-end independent living community where we rolled out our industry-leading MyChoice Dining program. I'm happy to report that this community is currently in a 12-month census high. We are also on target to complete the conversion of full units of independent living to assisted living also in the Dallas market that I brought up last quarter. Looking at our owned portfolio now. In Indiana, we finished converting 5 communities with 450 independent living units to assisted living. We are currently awaiting the state to approve our license to operate as assisted living. Once they are approved, these communities will be better able to compete in their respective markets given the change in demand over the past several years. We recently broke ground on a 91-unit independent living expansion at a community that we will manage for SNH. This expansion will be open for business in 2019 and will be on a campus-like setting along with an existing assisted living and memory care community. In the remainder of 2017 and into early 2018, we expect to break ground on expansion projects at 3 additional communities

[Scott Herzig:]

Thank you, Bruce. Well, I'd first like to start off by adding my thanks to the hundreds of team members at our Houston, Texas communities and at our Florida and Georgia communities as they prepared for and took heroic efforts related to Hurricane Irma and Hurricane Harvey to ensure the safety and security of our residents even as their personal family lives were turned upside down and, in some cases, continue to be significantly impacted. Our team members put our residents' health and safety above all else, and we truly appreciate their commitment. In addition to our community-based teams, our regional and corporate teams performed admirably and assisted in every possible way to ensure our residents and local team members remained safe. Five Star has a long history of being extremely well prepared for natural disasters such as these. And with emergency backup systems already fully in place, we did not have to evacuate any of our 3 Houston area communities as a result of Hurricane Harvey. In Florida and in parts of Georgia, government mandates and worsening conditions did force us to evacuate 5 of our communities, but damage was minor enough at all of those buildings to allow for all of our residents to return a few days later. Had it not been for our ongoing capital investments in Florida to be better prepared to withstand a hurricane with reinforced buildings and windows, the damage would have been far worse. Thanks again to our incredible team members in Florida, Georgia and in Texas. Now turning to occupancy. Total occupancy was 83% in the third quarter, down 10 basis points sequentially and down 80 basis points year-over-year. Senior living occupancy grew throughout the third quarter, and in fact, our senior living occupancy in September was our highest level since January. October move-in numbers were strong as well, and we continue to see move-in activity ahead of last year's pace. In the third quarter, we also benefited from a positive attrition rate as move-outs due to death and higher level of care decreased. We continue to be aggressive in our revenue management efforts, adding additional communities to our program, and our efforts to be more competitive with pricing is helping us on the move-in front and increasing RevPAR. We continue to focus on our resident referrals, which are up 15% year-over-year and on our Five Star website, which is up 16% year-over-year. Our ongoing website enhancements have allowed us to control the digital space and reduce our reliance on third-party referral sources. Now turning to our Ageility Physical Therapy Solutions division. Revenue for this division were $7.6 million in the third quarter, up 8% over the prior year. We added 3 new outpatient clinics in the third quarter, all of which were outside the Five Star footprint. As of today, we service a total of 90 outpatient clinics, 6 of which are unaffiliated with Five Star. We are pleased with our pace of growth in this division and will continue to add more clinics, both affiliated and unaffiliated with Five Star, in the ensuing quarters. And one final update on our electronic medical records initiative. Earlier in the year, we began a rather significant project to convert all of our skilled nursing units to an electronic medical records platform. We have made continued progress with this initiative and are currently in the home stretch, with nearly 85% of our freestanding and CCRC skilled nursing units fully converted and operational. We will look to wrap up this part of our overall conversion plan early in the first quarter. As a reminder, being electronic with our medical records allows us to more easily share our outcomes with key referral sources, improves communications with physicians, reduces medication and transcription errors and is vital to participation in all of the organized health care programs. I will now turn the call over to Rick Doyle, our Chief Financial Officer.

[Rick Doyle:]

Thanks, Scott, and good morning, everyone. As Bruce mentioned, for the third quarter 2017, our senior living revenue of $280 million was up slightly when compared to the same period in 2016, primarily due to an increase in our average monthly rates in our leasing of two additional communities in the fourth quarter of 2016. Our managed fee revenue was $3.4 million for the third quarter, an increase of 2.3% compared to the same quarter last year. This increase is primarily due to the five additional managed communities we now operate compared to the same period in 2016. Senior living wages and benefits for the quarter were $138 million or 49.4% of senior living revenue. This was a 60 basis point or $800,000 decrease compared to the same period in 2016. The decrease is primarily due to a decrease in our health insurance and workers' compensation insurance programs, offset by an increase in salaries of 1.3% year-over-year in our leasing of two additional communities since October 2016. Additionally, we incurred approximately $600,000 of labor overtime costs associated with Hurricanes Harvey and Irma. This further demonstrates that our wages and benefits are well controlled as we are able to adjust the use of our staff as our occupancy changes. Other senior living operating expenses for the quarter were $71 million or 25.5% of senior living revenue. This is an increase of approximately $1.1 million as compared to the same period in 2016 after adjusting for an $800,000 recovery of prior period litigation costs we received in the third quarter. We had an increase of approximately $2.2 million in the third quarter in our liability captive insurance program due to an increase in claims in professional and general liability insurance. This was offset by an overall decrease in our daily operating expenses where we have successfully maintained our strategy to control costs across the entire portfolio. General and administrative expenses were $17.9 million or 5.1% of total revenue for the third quarter, which was flat year-over-year after adjusting the prior quarter for transaction costs. Rent expense for the quarter was $51.8 million, an increase of 2.3% compared to the same period last year and 18.5% of senior living revenue. The increase primarily relates to our leasing of two additional communities since October 2016 as well as rent increases related to capital improvements made at our leased communities since January 2016. Interest expense for the third quarter was $1.1 million, an increase of 20.5% compared to the same period last year due to increased borrowings under our credit facility. We reported a loss from continuing operations of $0.13 per share compared to a loss from continuing operations of $0.12 per share for the same period in 2016. Adjusted EBITDA for the third quarter was - in 2017 was $3.3 million. Turning now to our liquidity, cash flows and selected balance sheet items. At September 30, we had $8.7 million of cash and cash equivalents and $5 million in borrowings outstanding on our $100 million secured revolving credit facility. The credit facility is secured by ten of our owned senior living communities. In September, we prepaid a mortgage note that had a principal balance of $13.1 million and recorded a gain of $143,000 on early extinguishment of debt. At quarter end, we had approximately $347 million of net property and equipment, which includes 26 communities directly owned by Five Star, five of which are encumbered by mortgage debt. The carrying value of these mortgages is approximately $45.6 million with a weighted average annual interest rate of 6.2% in a weighted average term of seven years. As Bruce mentioned earlier, with the sale/manage-back transaction, SNH has agreed to assume approximately $34 million of mortgage notes in relation to four of the communities to be sold. We also plan to prepay $2.5 million of mortgage debt at one of the senior living communities to be sold at closing. After the transaction, we will have one $8.3 million mortgage note remaining, encumbering one senior living community. Our leverage was 26% of total book capital and 10% 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. We had a few problematic events in the quarter that encourage us as we move into the fourth quarter and 2018. Our communities and residents withstood Hurricanes Harvey and Irma so well that one cannot deny the extreme preparedness of our teams both at the community and at the corporate level. Our success was a result of both of these teams' foresight and execution and is one of those occasions that as CEO, strengthens my confidence in our people. These are the same team members that every day are focusing on the fundamentals of the business, taking care of our residents and improving the bottom line financial results through Five Star's industry-leading programs and services. By entering the agreement for the sale of six communities, we will continue to have the necessary capital to support our many initiatives designed to strengthen our company in the current operating environment and in the future. I will now turn it back over to our operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from Jason Plagman of Jefferies.

[Jason Plagman:]

First question, I might have missed it, but did you mention any incremental expense or revenue impact from the hurricanes?

[Bruce Mackey:]

We didn't call it out, Jason, but it wasn't that material. We probably had $0.5 million of extra labor associated with overtime from staff staying in the communities and maybe $200,000 or $300,000 worth of repairs and maintenance damage. But again, we dodged the bullet on that one, so it wasn't too bad.

[Jason Plagman:]

And as far as the sale-leaseback transaction, any additional details you can provide like - on occupancy of those communities or monthly rent levels?

[Rick Doyle:]

This is Rick. Yes, the occupancy at these communities was about 91%. A little more color on the transaction. They generate revenue of about $20.5 million in EBITDA or up about, on historical results, about $7.2 million.

[Jason Plagman:]

And then the incremental rent expense we should expect once they're - all of the leasebacks are complete?

[Bruce Mackey:]

So, this is a manage-back transaction. So, we'll actually be getting a management fee from managing these going forward.

[Jason Plagman:]

Oh, okay. So, there won't be any incremental - any rent expense?

[Bruce Mackey:]

That's correct.

[Rick Doyle:]

That's right.

[Jason Plagman:]

And then, one other thing I noticed was the SWB and other expenses in the other category were up quite a bit sequentially. Is that just the ramp-up in expansion of the outpatient and therapy business? And how - any - should we expect those levels to remain somewhat elevated for the next few quarters? Or what's the kind of trajectory for those expenses on building out that outpatient therapy business?

[Bruce Mackey:]

The expenses on the outpatient, it's not that material. We've got - most of the staff is in-house to take care of it. We've got some capital associated with each clinic. But again, it's not material, maybe $20,000 to $50,000 of capital per clinic depending on the size, how much of equipment we put in it. So again, it's not that much.

[Jason Plagman:]

I was just looking at the SW - the other wages and benefits. You went from $2 million last quarter to $6 million this quarter, and the other operating expenses went from $1.4 million to $3.6 million. So, I wasn't sure if there was something else in there or reclassification. Just what caused that sequential increase in those other expense items?

[Rick Doyle:]

Yes, we did have reclassifications in our revenue as well as expenses. And they went from the reclassifications for the reimbursed income to senior living income as well as reimbursed in our expenses to salaries and wages, so there was no changes in total revenues or total expenses or NOI. And the reclassifications were just - we just thought it was appropriate to move some of these revenues and expenses to these senior living lines in salaries and wages that related to our rehab and wellness division.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bruce Mackey for any closing remarks.

[Bruce Mackey:]

Great. Thank you. I just want to thank everyone for joining us on our third quarter earnings call, and we look forward to updating you on future progress in the next quarter. Thank you. Bye.

[Operator:]

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