Five Star Senior Living Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good morning and welcome to the Five Star Senior Living Third Quarter 2018 Financial Results Conference Call. All participants today will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded today. I'll now turn the conference over to Brad Shepherd, Senior Director of Investor Relations. Please go ahead.

[Brad Shepherd:]

Thank you. Welcome to Five Star Senior Livings call covering the third 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 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, November 14, 2018. The company undertakes no obligation to revise or publicly released the results in 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 everyone for joining us on our third quarter 2018 earnings call. Before I turn to our operating performance of this quarter, I'd like to comment on two disclosure items. First, a few weeks ago, we filed an 8-K disclosed in the NASDAQ informed us with the bid price of our common stock, and closed below $1 per common share to 30 consecutive days. If we do not regain compliance within the allotted grace periods, which could be up to 360 days, NASDAQ may be lift our common shares. Process low share price has a reflection of our low public float coupled with industry headwinds, and our resulting financial performance. Second, as we stated in our earnings release, and will include in our 10-Q that we will file later today, there are conditions that raised substantial doubt about our ability to continue as a going concern. Specifically, based on our cash balance at the September 30, 2018 and projected cash needs the next year, we pursue a plan of action to fund our operating and capital requirements and meet our debt obligations. We do have options available to us to raise capital based on the strength of our balance sheet, including selling some of the Senior Living communities that we own. Despite having some success with recently implemented growth strategies, the impact of these strategies has not been enough to significantly improve our near-term financial performance. We recognize that more needs to be done. For example, there have been informal discussions with senior management of Senior Housing Properties Trust or SNH our Primary Senior Living Community owner on how we can work together to improve Five Star's long-term stability. However, these discussions have implemented to this point they may or may not result in anything being done with SNH. Moving on to the third quarter performance, early this morning, we reported negative $12.4 million of adjusted EBITDA for the third quarter of 2018, which was down from $3.3 million from the same quarter last year. This decrease is result of comparable community adjusted EBITDA, decreasing $14.4 million and a $1.7 million reduction in adjusted EBITDA through the sale of seven Senior Living Communities over the last year. Senior Living revenue for the third quarter of 2018 decreased 2.5% or approximately $7 million as compared to the same quarter last year. However, most of this decrease is a result of the sold communities as a comparable community Senior Living revenue only decreased 40 basis points. Similar to last quarter, the biggest negative drivers of our comparable community revenue year-over-year were 1.7% decrease in skilled nursing revenue and a 5.2% decrease in memory care revenue, these decreases were offset by an increase in independent living revenue of 1.5%. We continue to see pressure at our standalone skilled nursing facilities and the skilled nursing units at our CCRCs. Skilled nursing revenue at our comparable communities was down $1.3 million primarily due to a decrease in occupancy, occupancy at our leased SNFs was down 320 basis points from the third quarter last year to 76.9% and we're seeing a similar trend in the skilled units at our CCRCs. As we've discussed in the past, efforts being led by Accountable Care Organizations and managed Medicaid programs all resulting in decreased length of stay causing a decrease in occupancy and lower rates. It is an ongoing initiative of ours to recognize and serve the ongoing demand changes in our markets. Accordingly, we're in the process of evaluating all of our skilled nursing units within our CCRCs and examining the feasibility and profitability of repurchasing some or all of these units. Memory care revenues were down $1.4 million on a comparable community basis in the third quarter compared to the same quarter last year due to a decrease in occupancy. Memory care continue to be the fiercest source of new competition in our markets, these decreases will offset by an increase in independent living revenue while our independent living occupancy decreased from last year, we were able to drive larger rate increases to offset this. Ageility Physical Therapy Solutions, our rehab and wellness division, continue to produce solid growth. Revenues for the third quarter were $8.6 million, which was a $1 million increase or 13% more than the third quarter of 2017. This group had a very active third quarter helping nine outpatients clinics including four in Washington State, a new state for us and one where we do not operate any Five Star Senior Living Communities. As of the end of the third quarter, we operated a total of 120 outpatient clinics, 14 of which are not affiliated with the Five Star Community and have opened a total of 28 so far in 2018. We continue to see high demand for the service amenity and look to add more outpatient clinics to our platform. Total occupancy was 82% in the third quarter down 100 basis points compared to the third quarter of last year, while occupancy decreased year-over-year, we had 60 basis point increases sequentially from all of our portfolio segments. Looking at these portfolios individually, our owned communities increased 40 basis points, our leased IL, AL communities increased 10 basis points, our leased CCRCs increased 70 basis points and our leased standalone skilled nursing facilities increased 220 basis points sequentially in the third quarter. We contribute a good portion of the growth to the increased use of our revenue management program at our private pay communities where pricing is adjusted continuously due to up or down to match the demand for specific products in specific markets. Concurrent with occupancy, we saw an increase in quarterly movements of almost 3% both sequentially and year-over-year which is at the high end where you seen as percentage over the past two years. On average, we are adding eight to 10 communities per month the revenue management program. At the end of October, we had 135 communities or 53% of our private pay communities actively using this program. We added 35 communities to the program since June and we are on schedule to have all of our community's revenue managed by the end of the first quarter of 2019. Subsequent to quarter end in November, we started managing a senior living community for SNH with approximately 238 senior living units. The community is 100% private pay and is located in Colorado with a strong presence. This community should generate approximately $400,000 of additional annual maintenance fee revenues going forward. I would be remiss if I did not address the recent hurricanes in the Southeast, overall our senior living communities fared very well, we evacuated approximately 10 communities in North Carolina and South Carolina, we're very fortunate to have incredible team members and regional management teams and I would like to recognize them for their efforts, their emerging preparedness and execution, protecting our residents and our communities against these devastating storms allowing us to quickly resume operations and return our residents to their homes. I will now turn the call over to Rick Doyle, our Chief Financial Officer.

[Rick Doyle:]

Thanks, Bruce. Good morning everyone. Our management fee revenue was $4 million for the third quarter an increase of 17.4% compared to the same quarter last year. This increase was driven primarily by the base management fee from the sale managed backed of six communities sold to SNH. We also saw an increase in construction management fee revenue as a result of ongoing projects and at two manage communities located in Tennessee. We now manage 76 communities containing over 97,00 units senior living wages and benefits for the third quarter were $142 million or 52.1% of senior living revenue. On a comparable community basis senior living wages and benefits increased $6 million or 4.4% compared to the same quarter last year. The increase was primarily due to overtime expenses in annual wage increases. Low record unemployment in the United States has made it more challenging to find qualified help, driving up overtime costs. This combined with a competitive labor market within the senior living industry are driving up wages and increasing our employment costs overall. Other senior living operating expenses for the quarter were a $76.8 million or 28.1% of senior living revenue. On a comparable community basis operating expenses increased approximately $7.6 million or 11%. The increase was primarily due to an increase in repairs and maintenance resulting from unit turnover costs and interior and exterior repairs and maintenance across our entire portfolio. In order to raise occupancy and bring in new residents we are making sure our communities in our units are up to standard today's senior living products. General and administrative expenses were $90 million for the third quarter an increase of 6.2% compared with same quarter last year. The largest increase in G&A expenses came from consulting and other purchase services as compared to the same quarter last year. G&A as a percentage of all revenue from communities we own lease and manage with 5%. Rent expense for the third quarter was $52.3 million an increase of 1% compared to the same period last year. The increase primarily relates to capital improvements we sold to estimates since January 1, 2017. This was partially offset by the rent reduction related to the sale of one skilled nursing community, leased from SNH in which our rent payable decreased by 10% of the net proceeds. Interest expense for the third quarter was $466,000 a decrease of 59% compared to the same period last year. That decrease is due to our prepayment of two mortgage notes and the assumption of two mortgage notes in connection with three senior living community as part of the sale managed back with SNH. Turning now to our capital investments and expansion opportunities, We spent approximately $13 million in capital expenditures on the third quarter and sold $6 million of capital expenditures back to our land line from our leased communities. One of our largest recent capital projects the farmer Park Lane in Dallas Texas. Our newly converted a renovated 46 unit assisted living wing recently opened. As of today we have 38 operational units of which 32 are occupied. In early 2019, we will begin converting the old assisted living units at Park Lane into memory care which will allow us to care for existing residents rather than leaving for higher level of care. We continue to evaluate other expansion and conversion projects to take advantage of opportunities in individual markets. Turning to our liquidity cash flows in selected balance sheet items, at September 30, we are $13 million of cash and cash equivalents nothing outstanding on our revolving credit facility secured by 10 of our own senior living communities. At quarter end we also had approximately $245 million of net property and equipment including 20 communities we owned with only one mortgage note of $8 million with an interest rate of 6.2%. With that, I will turn the call back to Bruce for closing remarks.

[Bruce Mackey:]

Thanks, Rick. Despite the ongoing industry challenges we are dedicated to providing the highest quality care and service for our residents. Our award winning programs, signature dining services and ability to create warmth and hospitality at our communities is unmatched in the industry. Our investment in our people, programs and communities are what sets Five Star apart and will continue help us grow our reputation and success as one of the largest and best senior housing operators in the country. Our commitment to senior care is unwavering, and we will continue to develop a long-term sustainable solution. I will now turn it back over to our Operator for questions.

[Operator:]

As with no questions being said, we will conclude today's question-and-answer session, and also conclude today's conference. We want to thank everyone for attending today's presentation, and at this time you may now disconnect.