Five Star Senior Living Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Good morning, and welcome to the Five Star Senior Living Fourth Quarter 2018 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, Senior Director of Investor Relations. Please go ahead.

[Brad Shepherd:]

Thank you. Welcome to Five Star Senior Livings call covering the fourth quarter and full year 2018 results. The agenda for today's call includes a presentation by Katie Potter, President and CEO; and Rick Doyle, Executive Vice President, 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, March 6, 2019. The Company undertakes no obligation to revise or publicly release 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 Katie.

[Katie Potter:]

Thanks, Brad, and thanks everyone for joining us on our fourth quarter and year-end 2018 earnings call. I would like to start the call by thanking Bruce Mackey for his many years of service to Five Star since its founding in 2001 and saying how honored I am to have been afforded the opportunity to assume the role of President and Chief Executive Officer. I'm excited for what I believe we can accomplish in the months and years ahead. There's a strong foundation at Five Star and we are well positioned to capitalize on a number of opportunities as the senior living industry evolves. That foundation begins with our team members. Our team members are what is truly special about Five Star. They are selfless and go out of their way every day to live out our values and honor our residents and clients. I've had the pleasure of working with many of these team members since I started with Five Star seven years ago and look forward to meeting and learning from many more of our team members in the future. An acknowledgment for the many, many contributions of our team members, in 2019, Five Star will have a renewed commitment to our team members. Specifically, Five Star will be focused on ensuring that all team members are treated with respect and work in an environment where that is valued. Five Star will also focus on supporting our team members by providing them with the tools necessary to be successful, including increased training and development opportunities. Finally, we will recognize the contributions and successes of our team members, and we will reward and promote them accordingly. In return, all team members at every level of the organization, including myself, our management team and the leaders in our communities will be expected to reframe challenges as opportunities and will be held to a higher standard. We will also foster a work environment that promotes robust and interactive communication across the organization and celebrate creativity, and most exciting, innovation. This commitment will continue to inspire a workforce that is dedicated to serving our residents and clients as well as attracting high-performing individuals. From a senior living operational standpoint, we have begun to implement three key initiatives with targeted goals for 2019. The first of which is related to our continued focus on operational excellence and providing an exceptional resident experience and includes our continued partnership with J.D. Power and Associates with respect to their Senior Living Community Certification Program. This certification program was launched in 2018 to recognize the contributions senior living communities have made to improve quality of life for older adults, while also providing consumers with information necessary to make informed decisions when choosing a senior living community. Five Star Health pilots this certification process, which initially leverages resident satisfaction surveys to evaluate the communities and then communities are required to pass the rigorous on-site evaluation consisting of over 170 operational best practices. I am proud to report that last month, we announced that three Five Star communities in Florida were the first ever to receive the J.D. Power Senior Living Community Certification. This evaluation process will become the basis from which we will internally evaluate all of our senior living communities at regular intervals. The goal for 2019 is to continue to maintain operational excellence consistent with these operational best practices and add to the number of Five Star communities that receive this valued certification. The second strategic initiative for 2019 relates to our program that has been talked about in past earnings calls, which is our revenue management program. This program is used to continuously adjust pricing either up or down to match the demand for specific products in specific markets with the goal of maximizing occupancy. At the end of February, we had 160 communities enrolled in this program and we continue to add more at a pace of about eight to 10 communities per month. Our goal in 2019 will be to complete the enrollment of all of our communities into our revenue management program as well as evolve the program so that our pricing becomes more responsive to changes in the market. The last initiative for 2019 introduces the definition of operational segments by certain attributes unique to our product lines and community types. As one of the largest senior living operators in the country, we provide resident experiences that represent vastly differing needs and preferences. By defining operational segments at associated quality standards, we intend to provide a consistent resident experience across each segment and add value by creating brand recognition. A byproduct of this strategy will be cost efficiencies. But more importantly, it will provide a framework for decision making which will allow our community leaders to spend even more time with our residents, clients and team members. Before moving on to our operational performance, I would like to discuss the disclosure regarding our ability to continue as a going concern. After the announcement of our third quarter earnings, the boards of both Five Star and SNH formed special committees comprised solely of independent directors and trustees. And those committees engaged separate advisers to help facilitate discussions between the two companies. Since then, we have been actively engaged in discussions with SNH about a possible restructuring of our agreement to address our operating and liquidity challenges. As a result, there may be changes to our agreements with SNH in the future. However, we cannot be sure that there will be any changes to our agreements with SNH or whether Five Star will be able to continue as a going concern. Because of the ongoing nature of these discussions, we are not going to comment beyond these prepared statements on the potential theoretical outcomes that may possibly occur. We will publicly announce the results of these discussions if and when they are completed. Moving on to the fourth quarter performance. In the fourth quarter, we reported total occupancy of 82.9%, which was up 30 basis points compared to the same quarter last year and up 90 basis points sequentially. The greatest contributor to the increase in occupancy was at our CCRCs, where we are experiencing our highest occupancy in this segment since the first quarter of 2017. For the second quarter in a row, all four of our operating segments experienced increase in occupancy on a sequential basis with the CCRCs leading the way with 160 basis point increase over the third quarter. Our owned communities increased 80 basis points. Our leased IL/AL communities increased 50 basis points. And our leased stand-alone skilled nursing facilities increased 100 basis points sequentially in the fourth quarter. Average rate growth was modest, both year-over-year and sequentially. However, this was somewhat expected as we increase the number of communities enrolled in the revenue management program. Ageility Physical Therapy Solutions, our Rehabilitation and Wellness division, continues to grow nicely. Revenues for the fourth quarter were $9.5 million, which is a 16% increase compared to the fourth quarter of last year. This group had another very active quarter, opening eight additional outpatient clinics, three of which are not affiliated with the Five Star community. As of the end of the year, we operated a total of 128 outpatient clinics, opening a total of 36 new clinics in 2018. Our total externally contracted Ageility clinics was up to 18 by the end of the year, 12 of which were opened in 2018. We continue to see high demand for this service amenity and we'll look to keep up the pace of new openings in 2019. We have already opened four clinics and expect to open four more in the first quarter. We intend to continue to grow this line of business in 2019 and evaluate and develop other complementary ancillary businesses. I will now turn the call over to Rick Doyle, our Chief Financial Officer, for a discussion on the financial results.

[Rick Doyle:]

Thank you, Katie, and good morning, everyone. Earlier this morning, we reported negative $12.9 million of adjusted EBITDA for the fourth quarter of 2018, which was down from $2 million for the same quarter last year. This decrease is mainly a result of comparable community operating performance. To coincide with the occupancy increase Katie just mentioned, revenue increased slightly on a comparable community basis in the fourth quarter compared to the same quarter last year. The primary cause for the decrease in comparable community adjusted EBITDA was an increase in senior living wages and benefits, which were up 6.1% or $8.2 million in the fourth quarter. The increase was largely due to the use of contract labor and overtime expenses compared to the fourth quarter of last year. Wages and salaries expense was a significant challenge for us in the senior living industry in 2018 as the impact on operating results have been significant. The competitive labor market within the industry has resulted in higher employee turnover, forcing us to use contract labor as well as increased overtime costs. From a labor perspective, our main goals heading into 2019 are to decrease employee turnover and eliminate the use of contract labor. Standard pay was up approximately 4% in the fourth quarter of 2018, and we expect similar percentage growth in 2019. Overall senior living wages and benefits for the fourth quarter were $144 million or 52.2% of senior living revenue. Other senior living operating expenses for the quarter were $74.9 million or 27.1% of senior living revenue. On a comparable community basis, operating expenses increased approximately $2.4 million or 3.3%. Similar to past recent quarters, the increase here is largely related to repairs and maintenance. We continue to invest where needed to keep our units up to the quality standards of today's demand and in line with new competition. General and administrative expenses were at $20.8 million for the fourth quarter, an increase of 12.5% compared to the same quarter last year. Included in G&A expenses this quarter were net severance payments of approximately $750,000. Excluding this severance expense, G&A was up 8.4% compared to the same quarter last year and was 5.3% of all revenue from communities we own, lease and manage. Corporate salaries and wages represent much of the increase and is consistent with our commitment to investing in our team members. Interest expense for the fourth quarter was $1.2 million, an increase of 12.4% compared to the same period last year. The increase is due to higher borrowings on our credit facility compared to the same period last year. Turning now to our capital investments in the quarter. We spent approximately $12 million in capital expenditures in the fourth quarter and sold $3.2 million of capital expenditures back to our landlord from our leased communities. We continue to invest in our communities to ensure that they remain competitive by complementing Five Star's exceptional resident and client experience. Turning to our liquidity, cash flows and selected balance sheet items. At December 31, we had $29.5 million of cash and cash equivalents and $51.5 million outstanding on our revolving credit facility. We are currently evaluating options to refinance the credit facility, which is scheduled to expire in June 2019. We cannot be sure that we will obtain any renewed or restructured credit facility. And our ability to do so will likely depend on lenders belief that our operating leverage and expected future operating results will improve. At quarter-end, we had approximately $244 million of net property and equipment, including 20 communities we own with only one mortgage note of $7.9 million with an interest rate of 6.2%. With that, I will turn the call back to Katie for closing remarks.

[Katie Potter:]

Thanks, Rick. We believe 2019 will be a transformational year for Five Star. While our priority is finding a long-term solution to our current liquidity challenges, we are equally focused on the initiatives I spoke about earlier. There is a reoccurring theme in these initiatives and that they all begin with providing our team members with the necessary tools and support so that they can continue to be successful in creating an exceptional resident and client experience. We are excited about furthering an operational environment where nothing but the highest standard of quality is acceptable. I will now turn the call back over to our operator for questions.

[Katie Potter:]

Thank you. I look forward to updating everyone on our progress in future quarters. Thank you for joining us.

[Operator:]

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