Five Star Senior Living Inc.
Q4 2017 Earnings Call Transcript

Published: 21 Mar 2018

[Operator:]

Good morning and welcome to the Five Star Senior Living’s Fourth 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 Brad Shepherd, Director of Investor Relations. Please go ahead.

[Brad Shepherd:]

Thank you. Welcome to Five Star Senior Living’s call covering the fourth quarter and full year 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, Wednesday, March 21, 2018. 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 fourth quarter and year end 2017 earnings call. Before we begin our prepared remarks, I would like to take a minute to say we are deeply saddened by the recent unexpected passing of Barry Portnoy, our Founder and one of our managing directors. We extend our sincere condolences to Barry’s family and friends. Barry was truly an amazing individual and set high standards for us of all here at Five Star. I worked with Barry for over 20 years and he was a great mentor to me during that time. His leadership and vision will be missed. Yesterday, Adam Portnoy was elected to serve as Managing Director of Five Star. I have worked with Adam for 15 years and confident in his ability to help lead Five Star into the future. Now, turning to our operational results for the quarter, adjusted EBITDA for the fourth quarter of 2017 was $2.1 million, down from $3.5 million for the same period last year. This is the result of senior living revenues down 30 basis points and total expenses up 30 basis points after adjusting for both non-recurring compliance assessment costs. Our total expenses would have been down quarter-over-quarter if not for certain insurance-related expenses, which Rick will discuss in more detail later. On the private pay side of the business, we saw a 30 basis point increase in independent living, assisted living and memory care revenues in the fourth quarter of 2017 compared to the same period last year. This was driven by independent living and assisted living revenues, which were up over 1% as we are able to mitigate decreases in occupancy with increases in rates in these lines of businesses. Memory Care was a portion of the private pay business, where we were not able to overcome occupancy loss with increased rate as this has been the fiercest source of competition over the past year. Memory Care revenues were down 3% in the fourth quarter compared to the same quarter last year, because 50% of our memory care units had new memory care units open up within 5 miles over the past year according to the NIC data. On the government reimbursement side of the business, we saw a $2.7 million decrease in skilled nursing revenue with the majority of that coming from our leased standalone skilled nursing communities. Occupancy at our leased skilled nursing facilities was down 220 basis points from the fourth quarter of 2016 to 78%. As we have discussed in the past, government reimbursement rates continue to be under pressure resulting in lower margins. Efforts led by accountable care organizations and managed care programs are resulting in decreased length of stay, lower reimbursement rates and in many cases are requiring people to bypass a stay at the skilled nursing facility and go home for care at a lower cost alternative. Our standalone leased skilled nursing communities are still profitable for us and continue to cover rent by over 2x. We continue to apply strategies to mitigate our shrinking margins including the implementation of electronic medical records which Scott will talk about more in a bit. On last quarter’s earnings call, we announced that in the fourth quarter we have entered into a sale of manage backed agreement with Senior Housing Properties Trust to sell six senior living communities for an aggregate sales price of approximately $104 million. As of December 31, we had sold two of the six properties for approximately $39 million. Two properties closed subsequent to quarter end for approximately $42 million leaving two properties left as we expect to close during the second quarter. The completion of this sale gives us access to capital by realizing a portion of our owned portfolios value and further reduces our long-term mortgage debt balance. We intend to use the proceeds from the sale of manage backed transaction for general business purposes including the future capital investments in our remaining leased and owned communities. Last year, I announced several initiatives designed to improve occupancy and cash flow from our senior living communities. The list of initiatives includes growth through internal expansions, improving our current communities through capital investment, revenue generating initiatives which complement our existing senior living operations, utilization of expense efficiencies, investment in human capital and continuing to create industry leading programs and improving resident satisfaction. These initiatives have strengthened our business through this current oversupply operating environment and will continue to do so well into the future. We made some good headway in a lot of areas during 2017 and Rick, Scott and I will update all of you on the execution of each though out this call. I want to start off by talking about capital investments and expansion opportunities. We spent approximately $60 million in capital expenses in the fourth quarter and $71 million in 2017, approximately 56% of the CapEx spent in the fourth quarter and in 2017 was funded by our landlord senior housing for use at our leased properties. Our rent expense will increase approximately $3.2 million as a result of these capital sales of senior housing in accordance with our lease terms. While that may put a bit of pressure on coverage in the near-term, the underwritten EBITDA growth we expect to generate as a result of these capital improvements will largely exceed the rent increase. The largest project we currently have ongoing in our leased portfolio is at our CCRC in Dallas, Texas called The Forum at Park Lane. Here we are converting over 40 units of independent living apartments into assisted living units. These units are currently out of service and have been since the middle of 2016. When completed which is expected in the second quarter of this year, these units will be among some of the nicest assist living units in the Dallas market. After the conversion is complete we plan to create a memory care unit within this community that will allow us to care for some of our existing residents as opposed to them leaving us for a higher level of care. We continue to move forward on our other expansion projects to take advantage of opportunities in certain markets and find growth internally. We are awaiting final approvals to begin construction of two memory care units at two of our leased CCRC communities. We will be adding 48 units of memory care in a California CCRC and 32 units at a CCRC located in Delaware. We are also awaiting final approval to begin construction of 24 units of memory care at a managed assisted living community in California. And lastly, we have begun construction of a 91 unit independent living community that is in Tennessee that we will manage. We expect this community to be complete in the middle of 2019 and as of last week the units were almost 40% pre-leased. One of the larger initiatives and thus a large piece of the capital investment in our CCRCs is the Rehab to Home program that we introduced last year and continue to talk about. Last quarter, we completed the project at a managed community in the Scottsdale, Arizona market. We have seen our Medicare census increase from an average of 17 residents per day prior to project completion to just over 20 residents per day after the project completion. Another Rehab to Home project we completed before this was at a leased CCRC in Bloomington, Indiana and we have seen very similar results. We achieved these gains in spite of an extremely difficult skilled operating environment right now. These are prime examples of how the Rehab to Home program is intended to work. We are awaiting for the state to issue our license to operate at a latest Rehab to Home project at a leased community in the Columbus, Ohio market. When opened, we expect to see a similar result. We are starting to work on another Rehab to Home project at our leased CCRC in the Delaware market as well. We expect this project to be completed may be end of 2018. We will continue to evaluate other skilled units where this initiative makes sense. Looking at our own portfolio now, in Indiana we finished converting five communities with 450 independent living units to assist the living units in 2000 – in Q3 of 2017. We are still waiting on the state to approve our license to operate as assisted living which we expect will happen in the second quarter. 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 have been investing capital into our communities and we will continue to do so to ensure that they will be able to compete with all the new inventory that we have seen and expect to see in 2018. As we have said in the past, we are not to be complacent as we are going to see the industry dynamics improve. We are going to position our communities to better compete in their respective markets now and we will take advantage of the foreseeable increase in demand in the future. To that extent, the sale of manage backed transaction provides us with a capital to help maintain our flexibility as we move forward into 2018. I would now like to turn the call over to Scott Herzig, Five Star’s Chief Operating Officer to talk about operations.

[Scott Herzig:]

Thank you, Bruce. Total occupancy was 82.6% in the fourth quarter, down 40 basis points sequentially and down 130 basis points year-over-year. Not unexpectedly, move-in activities slowed in the latter part of the fourth quarter due to normal seasonality and some early impact of the flu. However, total movements for the fourth quarter were still up 1% compared to the fourth quarter of 2016. Additionally, our total move-ins for all of 2017 outpaced 2016 by nearly 2% despite the continued impact of new construction which is still negatively impacting our communities. Our ability to quickly and effectively revenue manage many of our communities combined with our increased dominance of the digital space were the main drivers for this year’s year-over-year improvement with move-ins. In fact move-ins directly from our Five Star website were up 14% year-over-year and now account for 22% of our total movements. However, unlike in the third quarter where we benefited from positive attrition rates related to move-ins and move-outs, the fourth quarter discharges outpaced move-ins due to higher rates of mortality and higher levels of care. The senior living industry continues to battle against the growing number of options available to seniors including staying in their homes as opposed to living in our communities, combined that with lower length of stay caused by the increasing average age of new residents and their increased level of frailty and you have two additional occupancy barriers to overcome accompanied by new supply. This fact only further emphasizes the importance of our focus on driving new customers to our communities by showcasing why a Five Star community is different and superior to the competition. Looking at move-in activity for the first two months of this year, January was a good month for us and February was even better. Overall, we are slightly ahead of last year’s pace despite the challenge of having more than 40 of our communities close to admissions at some point during this period because of the flu. This compares to only a handful of communities close to admissions in the fourth quarter of 2017. Our aggressive approach to quarantining and treating illnesses related to flu, have been successful and at this time we only have a couple of our communities unable to admit. Turning now to our Ageility Physical Therapy division, we continued to be pleased with the performance and growth of this division. Revenues for the fourth quarter were $8.2 million, a 16% increase over the fourth quarter of 2016. For the year ended 2017 revenues for Ageility were approximately $31 million which was up $3.4 million compared to 2016. We opened a total of 15 clinics in 2017, six of which are not affiliated with Five Star community. As of today, we operate 102 outpatient clinics, 8 of which are not affiliated with the Five Star community. In 2018, we would like to slightly outpace this year’s total of adding both Five Star outpatient clinics and non-Five Star outpatient clinics to our existing platform. And now to an update on our electronic medical records initiative. Earlier in 2017, we began a rather significant project to convert all of our skilled nursing units to electronic medical records platform. And I am pleased to report that we have now completed the conversion of all of our freestanding and CCRC skilled nursing units. With Phase 1 of our conversion project complete, we will now proceed to Phase 2 which will involve conversion of our assisted living units to an electronic medical records platform beginning with those units in our CCRC environment. 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 healthcare programs. Moving on to a couple of updates related to our higher profile company initiatives, the MyChoice Resident Dining Program and our company branded Rising Star Program. We are now fully operational with the MyChoice Dining Program at 7 of our large independent living and CCRC communities, 6 of which are managed and 7 that is leased. These communities now offer multiple dining venues at each site ranging from coffee and espresso bistros to sports pubs and fine dining restaurants, utilizing a point-of-sale system similar to what you would find in any public restaurant or café. Feedback has been extremely positive and our marketing research shows that this dining program is a difference maker to prospective new residents and had directly correlated to occupancy improvements where it has been put in place. We will continue to add communities to this program throughout the course of 2018 and beyond. In response to the ongoing shortage of qualified executive directors, senior living industry is experiencing, Five Star initiated our industry leading executive director in training program back in late 2016, which we call our Rising Star Program. Since that time, we have identified quality new leaders both inside and outside of Five Star provided them with one-of-a-kind focused and detailed training on how to successfully operate a Five Star community and placed those graduates in existing Five Star communities as executive directors. Since initiation of this program, we have enrolled 13 participants, 4 of whom who have graduated and are currently working successfully as executive directors in the Five Star community. The remaining 9 participants are in various stages of their training, which will continue throughout the remainder of the year. We are very pleased with the progress of this program and the candidates we graduate and we will continue hiring more Rising Star students throughout 2018. I will now turn the call over to Rick Doyle, our Chief Financial Officer.

[Rick Doyle:]

Thanks, Scott and good morning everyone. For the fourth quarter 2017, our senior living revenue of $279 million decreased $1.7 million or 60 basis points compared to the same period in 2016. Approximately half of the decrease was a result of a revenue reserve that we recorded during the quarter. The remainder of that revenue decrease is the result of the decline in occupancy offset by both an increase in our average monthly rates and an increase in revenue from our Ageility Physical Therapy division. Our managed fee revenue was $3.5 million for the fourth quarter, an increase of 4.5% compared to the same quarter last year. This increase is due to the 5 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 is over a $700,000 decrease compared to the same period last year. Drilling down a bit deeper, labor was up only 1% as compared to the fourth quarter of 2016 offset by a decrease of benefits to close to 6%. This nominal increase in labor cost demonstrates that they remain well-controlled as we adjust the use of our staff to accommodate for fluctuations in occupancy. The decrease in benefits is due to a decrease in our health insurance and workers’ compensation insurance programs from less claims compared to the same fourth quarter of last year. Other senior living operating expenses for the quarter were $74 million or 26.6% of senior living revenue. This was an increase of approximately $2.3 million compared to the same period in 2016 and includes an increase of approximately $2.8 million in our professional and general liability insurance for expenses. This was offset by an overall decrease in our daily operating expenses where we have successfully controlled costs across the entire portfolio. General and administrative expenses were $18.5 million in the fourth quarter, a decrease of approximately 4.2% compared to the same period last year. This decrease relates to lower corporate salaries and benefits offset by an increase in consulting fees. The consulting fees were associated with both the new revenue recognition accounting rules and the implementation of our new ERP system which went live on January 1, 2018. G&A as a percentage of all revenue from communities we own, lease and manage was 4.9%. Rent expense for the quarter was $52 million, an increase of 2.3% compared to the same period last year, an 18.6% of senior living revenues. The increase primarily relates to our leasing of two additional communities since December 2016 as well as rent increases from capital improvements that were sold back to our landlord at our leased communities. We reported a loss from continuing operations of $0.02 per share compared to a loss from continuing operations of $0.12 per share for the same period in 2016. The loss from continuing operations includes an asset impairment charge of approximately $1.6 million to reduce the carrying value of senior living communities classified as held for sale. In the fourth quarter of 2017, we have recognized a benefit from income taxes of $3.2 million, primarily due to monetizing alternative minimum tax credits. The new tax law that was enacted on December 22, 2017 has minimal net impact to price that as we have federal net operating losses were approximately $91 million at the end of the year. Now, turning to our liquidity, cash flows and selected balance sheet items, at December 31, we had $26.3 million of cash and cash equivalents and nothing outstanding on our $100 million revolving credit facility secured by ten of our owned senior living communities. At year end we had approximately $251 million of net property and equipment that included 20 communities we own and $59 million of net property and equipment classified as held for sale that included the four properties yet to close from the sale of manage backed transaction. SNH agreed to assume approximately $34 million of mortgage debt in relation to three of the six communities to be sold. In December, January and February, we have sold four of the six communities, two estimate for approximately $81 million. And we expect to sell the remaining two communities for approximately $23 million with approximately $70 million of mortgage debt to be assumed of third-party approvals obviously during the second quarter. After the transaction is complete, we will have one mortgage note remaining of $8.2 million with an interest rate of 6.2% due in September 2032 encumbering one of our senior living communities. With that I will turn the call back to Bruce for closing remarks.

[Bruce Mackey:]

Thanks Rick. As expected 2017 was a challenging year for the senior living industry and competition will continue to increase from new supply throughout 2018. Earlier in my prepared remarks, I recapped a list of initiatives that we introduced at the beginning of 2017. And throughout this call we have demonstrated the tremendous progress we have made on each of them. However, we have much more work to do. And while these initiatives are aimed at increasing profitability as I said many times before, we passionately believe that the fundamentals of the business that will determine our success. We continually strive to make Five Star the operative choice by providing outstanding quality care coupled with best in class services. In 2017, our focus on the fundamentals combined with our execution of strategic initiatives has strengthened our company. And we look forward to continue progress through adapting, improving and growing as the senior living industry evolves. I will now turn it back to our operator for questions.

[Bruce Mackey:]

I would like to thank everyone for joining us on our fourth quarter earnings call. And we look forward to updating you on future progress on future calls. Thank you.

[Operator:]

Your conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.