Five Star Senior Living Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good day and welcome to the Five Star Senior Living Second Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [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.

[Brad Shepherd:]

Thank you. Welcome to Five Star Senior Living's call covering the second quarter 2018 results. The agenda for today's call includes a presentation by Bruce Mackey, President and CEO; and Rick Doyle, 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 re-transmission 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 9, 2018. 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 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 Mackey, Five Star's President and CEO.

[Bruce Mackey:]

Thanks Brad and thanks for joining us on our second quarter 2018 earnings call. We reported negative $12.2 million of adjusted EBITDA for the second quarter of 2018, which was down from the $3 million for the same quarter last year. This decrease is a result of comparable community EBITDA decreasing $13 million and a $2 million reduction in EBITDA due to the sales of one leased skilled nursing community sold in the second quarter as well the six communities we sold in the previously announced sale managed backed transaction with Senior Housing Properties Trust. Senior living revenue for the second quarter of 2018 decreased 3.5% to $270.9 million from $280.9 million as compared to the same quarter last year. From a senior living revenue perspective, the biggest driver of our comparable community revenue decrease year-over-year was the skilled nursing revenue originating from our standalone skilled nursing communities as well as our continuing care retirement communities. Together, our comparable standalone SNF and CCRCs were down $6.4 million or 8.1% in skilled nursing revenue compared to the same quarter last year. Occupancy at our leased SNFs was down 500 basis points from the second quarter of 2017 to 74.7% and we are seeing a similar trend in the skilled unit at our CCRCs. As we just got to the past, efforts being led by accountable care organizations and managed Medicare programs are resulting in decreased length of stay and are increasingly require people to bypass skilled nursing providers and go home for care as a lower cost alternative. This is causing not only a decrease in occupancy, but also a shift in our payer mix from high reimbursement Medicare to lower reimbursement Medicaid. It is an ongoing initiative of ours to recognize and serve the ongoing demand changes in our market. Accordingly, we are in the process of evaluating all of our skilled nursing units within our CCRCs and examine the feasibility and profitability of repurposing some or all of these units. We've talked about our Rehab to Home program in the past, but in addition to that, we will determine if skilled units will be more profitable as other types of senior living operations where the demand is evident. On the private pay side of the business, independent living and assisted living revenues combined were flat in a comparable communities as decreases in occupancy were offset with increases in rates. Memory care was a portion of the private pay business where we were not be able to overcome occupancy loss with increased rates as it has been consistently one of the fiercest sources of competition in our markets. Memory care revenues were down 6.3% or $1.8 million on a comparable community basis in the second quarter compared to the same quarter last year. Ageility Physical Therapy Solutions, our rehab and wellness division, continue to produce solid growth. Revenues for the second quarter were $8.7 million, which was a $1.3 million increase or 17.1% more than the second quarter of 2017. And in second quarter, we opened three outpatient clinics. At the end of the quarter, we now operate the total of 111 outpatient clinics, 10 of which are not affiliated with the Five Star community. July was a busy month for Ageility as we opened four clinics located in the State of Washington. Washington is the new state for us and all of these clinics are located in communities not affiliated with Five Star. We continue to see high demand for this service amenity and look to add more outpatient clinics to our platform. Total occupancy was 81.4% in the second quarter, down 170 basis points compared to the second quarter of last year. While occupancy was down 30 basis points sequentially, we saw encouraging turnaround in occupancy as a second quarter progressed. After falling from March to April, total occupancy remained flat from April to May and increased 30 basis points from May to June. Looking at our portfolios individually, our owned independent and assisted living communities saw an increase in occupancy from 80.7% in the first quarter of 2018 to 81.1% in the second quarter of 2019. We also saw an increase in our leased independent and assisted living communities in the same period from 83.4% to 83.6%. We did experience a decrease in our standalone skilled nursing facilities during that same period from 75.5% to 74.7%. Our CCRC communities saw a decrease as well going from 81.5% to 80.6%. The drop in our CCRCs was primarily driven by decreased in skilled nursing occupancy, offset by an increase in occupancy at our independent and assisted living units. This positive momentum has continued into July as well. Move-ins for the month of July were up 8.7% over July of 2017. We believe this is a direct result of our increasing use of our revenue management program. On average, we are adding eight to 10 communities per month to our revenue management program. At the end of June, we now have 100 communities with 35% actively using this program with another 27 that have begun the process of being revenue managed. We initially had been focused on implementing this system at low occupied communities, but have recently started to focus on the communities with greater than 98% occupancy where we begin to push our rates. We are pleased with the result of the program so far as this has been the second quarter in a row our revenue managed communities have shown a substantial increase in movements compared to those not used in the program. In the second quarter, our revenue managed communities' move-ins increase 7% year-over-year compared to that's not on the system in which move-ins decreased 3% year-over-year. Finally, before I turn it over to Rick, I would like an update on our five owned Indiana communities in which we had recently finished converting 450 senior living units from independent to assisted living. One community is currently offering a full assisted living license. Two communities received their provisional licenses in July and will likely have full licenses by the end of the third quarter. The two remaining are awaiting inspection to be completed in the next few weeks and upon approval, will be operating on a provisional license. The four properties not yet operating on full licenses had occupancy of 76.5% in the second quarter, well below what is considered stabilized occupancy for their markets. The fully licensed community has seen occupancy increase of approximately 500 basis points and we expect to see a similar result when the remaining four obtain their licenses. I will now turn the call to Rick Doyle, our Chief Financial Officer.

[Rick Doyle:]

Thank you, Bruce and good morning everyone. I'm first going to touch on some of the second quarter financial highlights beyond what Bruce just covered. Our managed -- management fee revenue was $3.8 million for the second quarter, an increase of 6.3% compared to the same quarter last year. We now manage 75 communities containing over 9,500 units. Senior living wages and benefit for the second quarter were $141 million or 51.9% of senior living revenue. On a comparable community basis, senior living wages and benefits increased $5.9 million or 4.5% compared to the same quarter last year. The increase is due to higher employee health insurance expense, wage increases, and higher overtime costs. During the second quarter of 2018, we experienced higher acclaims in our health insurance compared to the same period in 2017 of approximately $2.5 million. This increase, however, is largely related to timing as our health insurance costs over the trailing 12 months of both periods decreased 5.7%. Also this year, new minimum wages were implemented -- 10 states we operate; Florida, California, and Arizona. Additionally, the record low unemployment rate has made it more challenging to find out which has driven up wages and overtime costs. Other senior living operating expenses for the quarter were $76 million or 28% of senior living revenue. On a comparable community basis, operating expenses increased probably $2.2 million or 3%. The increase is primarily due to an increase in repairs and maintenance, resulting from unit turnover costs associated with new move-ins spread across the entire portfolio. General and administrative expenses were $18.5 million for the second quarter, decrease of 4.5% compared to the same quarter last year. G&A as a percentage of all revenue from communities we own, leased and managed was 5.1%. Rent expense for the quarter was $52.1 million, an increase of 1.2% compared to the same period last year. The increase primarily relates to rent increases from capital improvements that was sold that 12 landlord at our leased communities. In June SNH sold to a skilled nursing facility located in California, which we previously leased for a gross sales price of $6.5 million. As a result of this sale, our annual minimum rent payable to SNH decreased by 10% of the net proceeds. Turning now to our capital investments and expansion opportunities. We've spent approximately $14.1 million in capital expenditures in the second quarter and sold $8.5 million of capital expenditures backed to our landlord from our leased communities. At one of our larger recent capital projects, The Forum at Park Lane in Dallas, Texas, we expect to have a license from the state to operate the newly converted assisted living unit in September. These 47 units had been out of service since the middle of 2016 as we will have 35 units occupied once we have the license. And we expect the remaining units to lease quickly. We continue to evaluate other expansion and conversion projects to take advantage of opportunities in individual markets. We have three expansion projects estimated to start later this year that will add units to communities where demand take place. Turning to our liquidity cash flows and selected balance sheet items. At June 30th, we had $22 million of cash and cash equivalents and nothing outstanding on our revolving credit facility secured by 10 of our senior living communities. During the second quarter, we sold the remaining two senior living communities from the sale managed back transaction with SNH to an aggregate sales price of approximately $23.3 million. This included the assumption of possibly $16.6 million of mortgage debt. As a result, at June 30th, we had approximately $248 million of net property and equipment including 20 communities we owned with one mortgage note of $8 million with an interest rate of 6.2%. With that, I will turn the call back to Bruise for closing remarks.

[Bruce Mackey:]

Thanks Rick. Obviously, this was a difficult quarter for a Five Star and [Indiscernible] industry as new units flood the market as a result of wrecking new construction starts over the past year or two. That combined with the decline in the growth rate of the 85 and above age demographic has created an operating environment that has not been seen in the industry for quite some time. Our efforts over the time to create liquidity for the company have helped us navigate this challenging environment. However, we still have a way to go. There are some recent positive signs as new construction starts are down significantly over the past year and we are encouraged by our recent gains in occupancy in some of our operating segments. Our revenue management program is gaining traction and we will continue to transition more community to this platform every month. Our capital investment program is also working and we will continue to invest in our communities to ensure that they are the community of choice in their markets. Most importantly, we will continue to invest in our people and our programs because those will make us the most successful in the long-term. I will now turn it back over to our operator for questions.

[Operator:]

And at this time, as I am not showing any questions, we will conclude our question-and-answer session. And I'll turn the conference back over to Mr. Bruce Mackey, President and Chief Executive Officer for closing remarks.

[Bruce Mackey:]

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

[Operator:]

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