Five Star Senior Living Inc.
Q3 2016 Earnings Call Transcript

Published:

  • Operator:
    Good morning and welcome to the Five Star Quality Care REIT Third Quarter Financial Results Conference Call. All participants will be in 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. I would now like to turn the conference over to Brad Shepherd, Director of Investor Relations. Please go ahead, sir.
  • Brad Shepherd:
    Thank you. Welcome to Five Star Quality Care's call covering the third quarter 2016 results. The agenda for today's call includes a presentation by Bruce Mackey, President and CEO; Rick Doyle, Treasurer and CFO; 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 3, 2016. 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 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 would also like to note that today's conference call will focus on Five Star's third quarter 2016 financial and operating results. We will not be discussing, taking any questions or making any comments on today's call regarding third-party tender offers for Five Star's common stock or potential board nominations. You can view the most recent company filings on these subjects at the SEC's website www.sec.gov. I will now turn the call over to Bruce.
  • Bruce Mackey:
    Great. Thanks, Brad, and thanks everyone for joining us on our third quarter earnings call. Before I begin, I would like to take this opportunity to thank all the Five Star team members, whose selfless and courageous efforts kept our residents safe, as they carried out the biggest evacuation in this company's history as a result of Hurricane Matthew. As we focus on our earnings it's important not to forget that we are in the business of taking care of people and our employees are continually called upon to go above and beyond to do this. I am very proud of our team for once, again meeting this challenge. Moving now to the third quarter's results. The third quarter was a challenging quarter for us and the senior living industry as a whole. While occupancy continued to decrease amidst new supply we're able to hold average monthly rates, continue to decrease our exposure to government payers and execute on our programs to create new sources of revenue. As many of you know the skilled nursing industry is continuing to deal with an increased number of challenges. There has been a concerted effort led by CMS and accountable care organizations to decrease the length of stay for patients, who need skilled nursing services. This, coupled with ever-increasing options for care outside the traditional nursing home environment has led to year-over-year decrease in our skilled nursing revenue in the third quarter of approximately $2 million, or 2.3% on a same-store basis at our standalone skilled portfolio and our CCRC portfolio. We've a few programs we've started and are developing to combat these challenges as Scott will talk more about later. Our same-store private pay independent living and assisted living revenues were only down 0.6% year-over-year despite the decreases we have seen in occupancy over that same time period. Furthermore, our same-store ancillary income, which includes our rehab and wellness program is up approximately 9.8% year-over-year, which offsets the decrease in private pay independent and assisted living revenues. This is an example of how in the wake of such large competition and operational headwinds, we able to hold revenue steady on our core businesses and have developed strong programs and initiatives to create new sources of income and strengthen the company. Our focus remains on increasing profitability through a list of initiatives that includes, improving our current communities through capital investment, internal and external expansions and acquisitions, revenue generating initiative, which complement our existing senior living operations, utilization of expense efficiencies, investment in human capital and continuing to create industry-leading programs and improve resident satisfaction. All these initiatives will strengthen our business not only in the current oversupply operating environment, but also, well into the future. On the capital and strategic side of the business, in September, Senior Housing Properties Trust or SNH entered into an agreement to acquire two senior living communities with a combined 126 living units, located in Illinois. If these acquisitions are completed, we expect to lease these communities from SNH and they will be added to one of our existing master leases. Net proceed after rent on these communities is expected to be approximately $150,000 annually. In October, we entered into an agreement to acquire an assisted living community with 63 living units located in Illinois for $7.9 million. This community has historical annual revenues of approximately $2.2 million and should generate approximately $700,000 of cash flow initially to us on an annual basis. These three communities, all have high occupancy are 100% private pay and are located where we have a strong geographic presence. In addition, we expect that our ancillary businesses will benefit from these acquisitions in the future as well. Additionally, we continue to grow through our third-party management business. In July, we entered into a management agreement with SNH for a senior living community located in Alabama, which has 163 living units. Also in October, we agreed to manage four senior living communities, SNH currently owns with approximately 350 living units. Our assuming the management of these communities is subject to conditions and we cannot be sure, those conditions will be satisfied. So on to the communities that we will acquire and lease, these five communities, that we will manage are 100% private pay and located in areas, where we have a strong geographic presence. These five communities should generate approximately $1.2 million of additional annual management fee revenues. It is also expected that our ancillary businesses will benefit from these management opportunities in the future as well. As we talked about in the past, a renovation initiative of ours called Rehab to Home converts existing skilled nursing beds in our CCRCs to high end private rehab suites. We are targeting younger Medicare eligible patients for shorter rehabilitation stays. Our modern units with amenities coupled with our food and concierge-like services, make us a preferred provider in the markets, where we have these units. We have just completed our most recent Rehab to Home project in South Carolina and are having a grand opening next week on November 10. This will be the first product type in the market and referral sources are very excited. We have three other projects well underway in Indiana, Ohio and Arizona. We have also recently approved an additional project in Delaware. We expect construction to begin in early 2017. Since the launch of this initiative we have opened 97 units in four communities. On the expansion front, as I mentioned in our Q2 call, we have opened three expansions so far in 2016. We have opened 68 units in three states and these expansions are filling up as expected. We are close to breaking ground on larger projects in Delaware and Tennessee. In Delaware, we will be constructing a 32-unit Memory Care Community located on a leased CCRC campus. In Tennessee we will be constructing a 91-unit independent living community, which we located next to an existing assisted living and Memory Care Community. Both projects are in the final stages of permitting and finalizing contracts with construction companies. We are also fairly close on two projects in California, which would add 72 units of memory care at two communities. One is a leased CCRC community, and one is a community that we manage. We will continue to evaluate other expansion projects at existing communities as we look for ways to take advantage of market opportunities and find growth internally. And finally on the dispositions front, in September of 2016, we sold an assisted living community we owned with 32 living units in Alabama. This community was reported as held for sale and was included in discontinued operations in our financial statements. Also in September, SNH sold a previously closed skilled nursing facility located in Wisconsin. This facility was unprofitable and closing it at a positive sequential quarter impact of $500,000. With the final sales of these two communities I'm pleased to report that we have completed the disposition program that we began several years ago. Today we no longer have any communities classified as held for sale. To recap, we have sold 12 communities, most of which were skilled nursing communities in rural markets where we did not have a strong geographic presence. This will allow us to continue to focus on our core private pay senior living business in the future. I would now turn the call over to Scott Herzig, Five Star's Chief Operating Officer to talk about operations.
  • Scott Herzig:
    Thank you, Bruce. I want to first start off by recognizing and adding my thanks to our brave and dutiful team members in the Florida, Georgia and South Carolina areas, for their heroic efforts to protect and care for our residents, as we were forced to evacuate 11 of our communities in areas impacted by last month's Hurricane Matthew. Although we took every possible precaution and prepare diligently to weather the storm, we were ultimately forced to leave these communities, as the hurricane worsened. This was by far our largest evacuation effort in our company's history, and we saw many of our teams in those affected areas, go way above and beyond and put their personal lives on hold to ensure the safety and security of their residents. We are extremely grateful to them for those efforts. I'm happy to report that all of our impacted residents and staff members are now safely back in their respected community. Our buildings weathered the storms well with only minor damage. However, we do expect to incur additional labor costs and costs from property damage that did not exceed our insurance deductibles to flow through in Q4. Turning now to occupancy. Total occupancy for the third quarter at our owned and leased senior living communities was 83.8%, down from 84.3% sequentially and 85% year-over-year. Occupancy at our managed properties was 86.4% in the third quarter. Total move-in activity for the third quarter slowed during the month of July, but we saw record move-in numbers during August and experienced another decent month in September. In fact, overall occupancy increased 20 basis points in August and remained steady through September. Similar to occupancy trends noted by NIC, we saw the most growth in occupancy in our IL sized business, where we improved by 60 basis points over Q2. Move-ins from existing resident referrals continues to be our best source of lead as does our own company website, where our content rich Five Star website now accounts for nearly 17% of move-ins, up 36% year-over-year. As our move-ins continue to grow from our own company website, our reliance on third-party referral sources like A Place for Mom continues to diminish. In fact move-ins from A Place for Mom are down to 4% of our total move-ins, which is down from 8% a year ago. Our goal continues to be to drive people to our own website rather than relying on referrals from third-party referral sources, due to their high cost, low conversion rate and low length of stay. We are pleased to say that our data shows that additional move-ins from our own website have largely offset any leads potentially lost from A Place for Mom. Now moving to rate; our percentage of private pay revenue was 78.6% in the third quarter and continues to increase on a quarterly basis. Our focus on the management of private pay communities coupled with our strategic disposition program has enabled us to consistently drive this percentage higher over the years. On the Medicare side, the final ruling from CMS came out regarding rates and those new rates went into effect on October 1. With 9.9% of our revenues coming from Medicare, this would translate to approximately a $2 million increase on an annual basis. As Bruce mentioned earlier, this quarter we experienced a significant decline in our skilled nursing revenues compared to last year. Although only 15% of our total senior living revenues come from skilled nursing, we have been active in looking at ways to stay competitive as more options for care outside of the skilled nursing environment become available. Traditional Medicare reimbursement is slowly being offset by the influx of new ACOs and MCOs, and utilization of electronic medical records are key requirement to participation in most of those programs. As such, we remain committed to our process to become fully electronic with medical records in the vast majority of our skilled nursing portfolio by the end of 2017. Another of our initiatives, key to staying competitive in the skilled nursing environment is our Rehab to Home program, which converts skilled nursing units to high-end rehab suites in our CCRCs. These units have been positively reviewed by our customers and have proven to be quite profitable. As others have also been reporting, our occupancy continues to be impacted by new supply in many of our markets. Out of our 213 owned and leased properties, NIC MAP tracks the supply of that in the markets where roughly 65%, or 140 of our properties are located. In analyzing the NIC supply data this past quarter, we found that 11% of our properties that were tracked had a new senior living community opened within a five mile radius in the past year. Additionally, 24% of our tracked properties have new supply under construction within a five mile that have not yet opened. This means that roughly one-third of our properties in NIC tracked market have seen or going to see new competition within a five mile radius. If you expand the radius to 10 miles, new supply has or will affect more than half of our properties. We are also seeing similar activity in the markets, where NIC does not track this data. One of the ways that we have chosen to combat this is by being aggressive in our capital improvement and refurbishment projects, to better position our communities as these new units come online. This approach has negatively impacted earnings in certain areas as we take units offline in order to complete the work faster, but over time we feel that keeping our buildings looking great will help us compete over the long-term. Additionally, we continue working extremely hard in telling our story at the community level, making sure everyone we come into contact with, knows what makes our communities different and better than the competition. Our award winning programs and dining services will lead the way as our caring, well-trained team members continue to create incredible customer experiences. With that in mind, one of our best reviewed program is our point-of-sale system. This is a system that allows our resident more choices, when it comes to dining options. Whether it's gastro pub cuisine in a sports pub setting, a cappuccino in a Bistro Cafe or high-end restaurant dining, our residents now have the ability to decide and choose how they want to dine. Although currently only in a handful of our buildings, we can directly point to this new offering as a reason for occupancy growth in the buildings, where it's operational. The goal is to continue rolling out this program to certain communities throughout the remainder of 2016 and to add 10 more buildings to the program in 2017. Turning now to our rehab and wellness division, we now provide outpatient services to 76 independent and assisted living centers located in 13 states. We have opened 13 of these clinics since the start of 2016 and plan to open one more before the end of this year. These clinics are built into existing areas of our communities for very minimal investment and typically pay for themselves in as little as nine months. This is a much sought after amenity in our revenue enhancing program that produced nearly $5 million in revenues in the third quarter, up 23% from the year prior. And one final update related to our recently announced Rising Star Program, where we identify groom and develop new Executive Director candidates. We have now hired our first few of many new Rising Stars in different areas of the country and look forward to continue to upgrade and improve our bench strength at this position, which we often say are the difference makers at the community level. I will now turn the call over to Rick Doyle, our Chief Financial Officer.
  • Rich Doyle:
    Thanks Scott, and good morning everyone. For the third quarter 2016, our senior living revenues were $277.4 million, compared to $279.7 million for the same period in 2015. The decrease primarily relates to the decline in skilled nursing revenue and overall occupancy, partially offset by an increase in our ancillary services revenue and increases in private pay rates. Our management fee revenues were at $3.3 million for the third quarter, an increase of 22.8% compared to the same period last year. The increase in management fee revenues are primarily due to the previously disclosed change in management fees with SNH in June 2016 and an increase on the number of communities we now manage compared to the same period last year. Senior living wages and benefits for the quarter were $137 million, or 49.5% of our senior living revenues. This represents approximately 1.5% increase compared to the same period in 2015. The increase primarily relates to annual wage increases - increases in health insurance claims and our acquisition of two senior living communities during the fourth quarter of 2015. At 49.5% of revenue, senior living wages and benefits were in line with our expectations and remain well-controlled. Other senior living operating expenses for the quarter were $70.9 million, or 25.6% of our senior living revenues. This represents a decrease of approximately $1.7 million, or 2.4% compared to the same period in 2015. The decrease is due to non-recurring professional fees and other costs recorded in the 2015 period related to our Medicare compliance assessment at one of our skilled nursing facilities as well as our continued focus on controlling operating costs across the entire portfolio. To that extent, we continue to see progress in our supply chain strategy as we have seen a decrease quarter-over-quarter in other expenses such as food, supplies and utility expenses. Our strategy has allowed us to implement system-wide brand standard to leverage our scale and reduce costs, while maintaining quality. General and administrative expenses were $18.5 million for the quarter, an increase of 11.8% compared to the same period last year. The increase primarily relates to $730,000 of one-time transactional costs incurred during the third quarter of 2016. In addition to this we recorded a benefit adjustment in the third quarter of 2015 to our G&A expenses. Excluding the transactional costs this quarter, our G&A was 5.2% of total revenues. If we include all revenues from communities that we own, lease and manage, G&A was 4.7%. We will continue to look for operational synergies to reduce our G&A cost. Rent expense for the quarter was $50.6 million, or 18.2% of our senior living revenues, an increase of 40 basis points of senior living revenues compared to the same period last year. The increase primarily relates to additional leases we added to our portfolio and capital improvements we sold to SNH since 2015, partially offset by rent reductions as a result of the sale of certain skilled nursing facilities that we leased from SNH during the past year. Interest expense for the third quarter was $945,000, a decrease of about 14.6% compared to the same period last year, primarily related to the repayment of our outstanding borrowings under our credit facility, partially offset by the assumption of a mortgage note in connection with our acquisition of two senior living communities during the fourth quarter of 2015. Depreciation and amortization expense for the quarter, third quarter was $9.4 million, an increase of 11.6%, primarily due to our acquisition of two senior living communities during the fourth quarter of 2015 and capital expenditures since 2015. We reported a loss from continuing operations of $0.12 per share compared to a loss from continuing operations of $0.54 per share for the same period in 2015. Net loss for the third quarter 2016 included benefit from income taxes of $934,000 related to a reduction of previously accrued estimated state tax expense resulting from the sale leaseback transaction with SNH, in June. Loss from continued operations for the third quarter 2015, included a non-cash charge for goodwill impairment of $25.3 million and compliance costs and professional fees of $920,000 related to the Medicare compliant assessment at one of our skilled nursing facilities. Adjusted EBITDA was $4.3 million and adjusted EBITDAR [ph] was $54.9 million for the third quarter 2016. Now I will review our liquidity, cash flows and selected balance sheet items. At September 30th, we had $43 million of cash and cash equivalents and nothing outstanding on our $100 million credit facility and $59 million of long-term mortgage note payable. Our credit facility expires in April 2017 and we will soon be working with the banks to replace this facility over the next couple of quarters. At quarter end, we had $353 million of net property and equipment, which includes 26 communities directly owned by Five Star, six of which are encumbered by mortgage debt. The weighted average annual interest rate on these mortgages is 6.3% with a weighted average term of approximately seven years and no maturities prior to June 2018. As of September 30, 2016 our federal net operating loss carry forwards were approximately $54 million and our tax credit carry forwards were approximately $19 million. Cash flows used in operating activities were approximately $4 million for the third quarter, 2016. We invested $40 million in capital into our community and sold $3.5 million of long-term capital improvements. Our leverage was 26% of total book capital and 11% of debt to total assets. We believe 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 passionately believe that focusing on the fundamentals of the business and increasing profitability through our many initiatives will strengthen our company in both the current operating environment and in the future. We have been through cycles such as the one we have currently experienced in the past and have always come out a much stronger company. The strength of our team along with our innovation and perseverance gives me great confidence that we are positioning this company to take advantage of the promising demographics on the horizon and are improving ourselves in the interim. As noted earlier in the call we will not be discussing, taking any questions or making any comments on today's call regarding third-party tender offers for Five Star's common stock or potential Board nominations. You can view the most recent company filings on these subjects at the SEC's website, sec.gov. I will now turn the call back over to our operator for questions.
  • Operator:
    Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Brian Tanquilut with Jefferies.
  • Jason Plagman:
    Hey guys. It's Jason Plagman, on for Brian. First question, are you guys seeing much in the way of wage pressure in your labor force, for nurses hours overall? And what's your outlook for kind of the next few quarters on that aspect as well?
  • Bruce Mackey:
    Yes, thanks, Jason. Historically we haven't seen that much so far and I think, if you look at our wages, they've been pretty controlled as a percentage of revenues. Yeah, I do think that's going to tick up a little bit in the next couple of quarters, could be 50 basis points or so, maybe a little bit more, as we start to see more of these States enact the minimum wage laws and again just the economy pushes the wage pressure on us. But historically we haven't seen much. I do think a little bit more is coming. Anything else Scott on that?
  • Bruce Mackey:
    Yes, I mean the overtime law that's coming down the pike here in December, compliance with that law will see a little bit of a some movement on the labor cost as well. But we're pretty confident that we have the systems in place to control - to control that to the best of our ability.
  • Jason Plagman:
    Okay. And on the pricing environment in the private pay segment, I think, how much discounting are you seeing or having to do and how should we think about with inflation ticking up your ability to raise rates at least in line, or if not above the rate of expense inflation?
  • Scott Herzig:
    This is Scott. We are seeing pressure on rates in different markets. It's not unlike anybody else has been reporting. We're holding the line, where we can and where we have a lot of new competition coming in. We're going to see some, some changes to rates to remain competitive in some of those environments. But it's really nothing different than anybody else has been reporting. There is a lot of new competition coming on in certain markets and we're just dealing with the best that we can.
  • Bruce Mackey:
    I think the second part of your question, I think in the near-term, I think increases to existing residents et cetera, should offset most of the inflation that we've seen on the expense side. We're still seeing a little bit of a positive spread there. In markets where we are seeing a lot more pressure because of competition we probably will be a little more selective with rates in offering discounts, et cetera. It's definitely prevalent on the marketplace right now, discounting and as Scott said, it's really market-dependent, community-dependent. Some we are not really seen too much and some we are seeing a lot more. But it's a balance. We've got to be selective, where we do discount rates and where we do sacrifice occupancy for rate.
  • Jason Plagman:
    Okay. Thanks. And last question, I know you said you aren't going to discuss the tender offers. But we hear from shareholders and I just, I would put the comment out there that I think shareholders would appreciate more communication from the board regarding their thought process for the tender offers and decision to reject the waiver request from Gemini and the potential for higher tender offer. So any increased communication shareholders there, I think would be greatly appreciated by us as well as other shareholders, we've been in discussions with.
  • Bruce Mackey:
    Okay. I appreciate that.
  • Operator:
    Thank you. And as there are no more questions at the present time, I would like to return the call to management for any closing comments.
  • Bruce Mackey:
    Great. Thank you, Keith. I want to thank you all for joining us on our third quarter earnings call and we look forward to updating you on our progress on future calls.
  • Operator:
    Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.