Five Star Senior Living Inc.
Q4 2008 Earnings Call Transcript
Published:
- Operator:
- Good morning ladies and gentlemen and welcome to the Five Star Quality Care Quarter Fourth Quarter 2008 Financial Results Conference Call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to the Director of Investor Relations Mr. Tim Bonang. Please go ahead, sir.
- Tim Bonang:
- Thank you, Jason, and good afternoon everyone. Joining me on today’s call are Bruce Mackey Five Star’s President and Chief Executive Officer and Fran Murphy, Five Star’s Chief Financial Officer. The agenda for today’s call includes a presentation by management followed by a question-and-answer session. Before we begin today’s call I would like to state that today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Laws. These forward-looking statements are based on Five Star’s present beliefs and expectations as of today, February 25, 2009. The company undertakes no obligation to revise our publicly release the results of any revisions of the forward-looking statements made on today’s conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investor’s are cautioned not to place undue reliance upon any forward-looking statements. With that I would like to turn the call over to Bruce Mackey.
- Bruce Mackey:
- Thanks Tim and thanks everyone for joining us this afternoon. Let me begin with a brief overview of Five Star Quality Care. Five Star is primarily a senior living services company that owns, leases, and operates senior living communities with approximately 22,000 living units located in 30 states. The units in our 210 communities break down by product type as follows
- Fran Murphy:
- Thanks Bruce and good afternoon everyone. In the fourth quarter of 2008 our senior living revenues increased $40 million or 19.3% to $249 million from the fourth quarter of 2007. Additional revenues from the 47 senior living communities that we began to operate in 2008 were responsible for $37 million or 93% of this increase. The remainder was due to high daily rates offset by decreased occupancy at our same store communities. Senior living operating expenses were $188 million in the fourth quarter, an increase of $31 million, or 9.8%, from the same period last year. $27 million of this increase was due to communities we began to operate in 2008. Increases in same store expenses, particularly for wages and benefits, explains the remainder of this increase. On a same store basis, senior living revenues were $211 million in the fourth quarter, an increase of 1.3% from last year, reflecting a 4% increase in average daily rates offset by a 230 basis point decline in occupancy. Same store senior living expenses were $161 million in the fourth quarter, an increase of 2.5% from last year due largely to increases in wages, benefits, and utility expenses. For all of 2008 our same store operating margins before rent, or EBITDARM, increased 3.4% over the prior year, while EBITDARM at our new communities was $28 million or 29% of these communities 2008 revenues. As Bruce mentioned earlier, we are keenly focused on building census and controlling labor, two key drivers of profitability for us. However, it is worth noting that we are always looking for ways to reduce costs, particularly in this challenging environment. Let me tell you about a few of the things that we’ve done or plan to do. In January we purchased 37% of our convertible senior notes, which has reduced our annual interest expense by $1.7 million. In the last few weeks we have entered into several multi-year electricity agreements in deregulated states that will save us nearly $500,000.00 a year and we are still exploring other opportunities in this area. Recently we entered into a new office supply contract that saves us $400,000.00 annually. On Monday of this week we entered into a three-year agreement with Omni Care that provides us with pharmacy services in areas that are wholly owned pharmacies don’t currently service. We believe that this agreement provides us with an opportunity for significant savings and control over this vital expenditure. Finally, we will be putting our $40 million annual food services contract out for bid later this year. We believe that many very good opportunities for savings exist in the current economic environment and we plan to take advantage of them. I will now discuss the operating result of our other business lines. First, at our hospitals revenues were flat in the fourth quarter compared with the fourth quarter of 2007, but down 3.5% for the year. The full year decline was due primarily to lower Medicare rates and the closing of several unprofitable outpatient clinics offset by a small increase in occupancy. Hospital expenses increased by 3.4% during the fourth quarter compared with last year, but decreased by 1.4% for the year, mainly due to reductions in labor costs and the closing of outpatient clinics. Rent at the hospitals we up slightly in 2008 due to added rent from the sale of capital improvements to senior housing. In 2009 we’ve embarked on another round of cost cutting and consolidation initiatives at the hospitals and these are already making a positive impact on their operating results. At our institutional pharmacy business both revenues and expenses increased by about 15% in the fourth quarter compared to the prior year, mainly as a result of adding additional Five Star residents to our customer base
- Operator:
- (Operator Instructions) Your first question comes from Kevin Ellich with RBC Capital Markets.
- Kevin Ellich:
- I would like to discuss the Five Star Solutions that Bruce talked about. Can you talk about the arrangements and costs associated with providing those services to the residents, are there any costs associated with that?
- Bruce Mackey:
- Breaking the three out, two of them don’t have any costs, elder life care or the elder loans do not. Those are, again, third party arrangements that the resident or perspective resident would enter into with the company. The veteran benefit has a minimal cost for an applications fee, but a nominal amount, several hundred dollars.
- Kevin Ellich:
- Are those exclusive arrangements or not?
- Bruce Mackey:
- No they are not. There was also marketing costs associated with them, but again it was not that material of an amount.
- Kevin Ellich:
- Okay. Then moving on to the cost savings that Fran talked about, how much was the interest expense savings?
- Fran Murphy:
- It was $1.7 million.
- Kevin Ellich:
- That is annually, from the convert?
- Fran Murphy:
- Yes, it is.
- Kevin Ellich:
- Okay and then the Omni Care agreement, is that going to be a significant expense savings?
- Fran Murphy:
- We’re not disclosing that at this time. It’s a combination of things that are coming into place. We’ve got a preadjudication consultant that’s involved in the process, so some of this will develop over time and we can report back to you later.
- Kevin Ellich:
- Okay, that’s helpful. Then moving down the line to food services contract that you’re putting out for bid, who is that contract currently with and what is your expectation for cost savings?
- Fran Murphy:
- It’s with FISCO. If we can pick up a few points it means a lot of money at a $40 million annual spend.
- Kevin Ellich:
- Okay that’s helpful and then Fran, you also talked about the delayed Medicare and Medicaid receivables. I’ve seen some other healthcare providers see some of these issues. Have you identified what the issue is? You have obviously made some personnel changes to try and prove that, so what is your expectation going forward?
- Fran Murphy:
- The personnel change wasn’t directly made to collect Medicare and Medicaid, it’s more directly related to private. The Medicare and Medicaid appear to be several unrelated conditions. Some of them are related to new facilities and getting their licenses.
- Bruce Mackey:
- That is probably the biggest piece and it is the Medicare provider numbers associated with the new community that we’ve taken on and a portion of Medicaid as well. Some of these new acquisitions, and I’m going back a little bit, do take Medicaid so it’s getting the provider numbers for those as well.
- Kevin Ellich:
- Right and with the purchase of the convert, could you have bought more or was there a certain limit that you guys were restricted to?
- Bruce Mackey:
- We had board authorization for a certain amount that we were under on. In addition if you purchased a majority of the convert and you have to go through a tender offer process, so we had to make sure that we didn’t violate that rule.
- Kevin Ellich:
- Is it possible you could purchase more or are you at that threshold where you can’t buy any more?
- Bruce Mackey:
- I think anything’s a possibility, but we’re not actively purchasing additional converts right now, but we’ll have to take a look at it in the future. It depends on the prices and the opportunities that are in the marketplace.
- Kevin Ellich:
- Definitely given the discount it seems like a very good use of cash and return of capital to the shareholders. Lastly, Bruce, what are you seeing on the economic front given the census kicked down a little bit and average daily rate was only up a couple percent. Is that what we should expect going forward, or what do you think on the pricing side?
- Bruce Mackey:
- On the pricing side we did hit 4% Q4 ’08 to Q4 ’07. I think you’ll see a similar range. We’ve been talking the first quarter of ’08 to the first quarter of ’07 we were probably north of closer to 5%. So we were down probably 10 basis points year-over-year, but I think we’ve been saying that for several quarters now that we expected it to come down a little bit, but we’ll still be in that 4% range.
- Kevin Ellich:
- Lastly on the free cash flow, what do you think the normalized run rate for the free cash is? Do you think $8 to $10 million per quarter is the run rate?
- Bruce Mackey:
- I think it’s going to the highly dependent on our occupancy levels. If you take into account for instance the paid remarks we had EBITDA, excluding all of the usual adjustments of close to $7 million that you invest in the cost savings initiatives and things like that that Fran talked about, so it’s not out of the realm, but again, it’s going to be highly dependant upon what future occupancy levels are going to be.
- Operator:
- Your next question comes from Joel Ray with Davenport & Company.
- Joel Ray:
- When I look at the number that have come through it sounds like there are lots of other unusual items here. But, am I correct that your pre tax number before a lot of these one-time items was about $1.8 million in the quarter? You’ve got the post tax of
- Fran Murphy:
- You’ve got the post tax of $0.03, but the tax amount is $470,000 of tax.
- Bruce Mackey:
- That would be right for the pre tax before the unusual items noted.
- Joel Ray:
- Okay and it looked like you had about a 2% operating margin. When you cut through all of this, what is a reasonable target, or do you have a target for, what type of operating margin you’ll be able to sustain in 2009 given the economy that we have today? Is this a reasonable one to try to sustain that?
- Bruce Mackey:
- I think it is. Again, it is going to go almost back to the same answer I just gave to Kevin. It is going to be highly dependant upon our occupancy. We think there are opportunities to improve at our pharmacy so that should improve our margin right away and then the cost initiatives that Fran outlined and then after that what the occupancy is going to factor into that.
- Fran Murphy:
- But that is a good point because the $1.8 million also includes the $1 million on the pharmacy and that was a one-time hit.
- Joel Ray:
- Very good, that is what I was kind of wondering about as well. So the point is operationally you, if you start x-ing out some of the stuff was actually better than the $0.03 type number.
- Fran Murphy:
- That is correct.
- Joel Ray:
- I take it at this juncture we’re probably going to hold back on making further acquisitions, focus on cleaning up what we have and focus internally versus looking at the exterior opportunities?
- Fran Murphy:
- Yes I think that’s fair, but we have to take a look at what’s coming in the door as well, so we will take a look. As of right now, though, the pipeline is very thin, there are not a lot of opportunities out there. What you are seeing really is, I am seeing a lot of not for profit CCRC’s going into bankruptcy. I’m seeing larger regional operators getting close to that point and it’s more who is facing a liquidity crisis right now? A lot of these people pulled their company’s together in the last few years and the property is really not worth a dent on the books. So it is going to be an interesting time for a lot of small operators and like I said those not for profits that run the CCRC’s.
- Bruce Mackey:
- Right and any time you look at liquidity it looks like well over $100 million, so it looks like we should be able to continue surviving. Just hang in there.
- Fran Murphy:
- That’s correct.
- Operator:
- Your next question comes from Jerry Doctrow from Stifel Nicolaus & Company.
- Jerry Doctrow:
- Bravo for buying back converts, we’re happy to see it. And just maybe to start on that one, was any thought given to buying back common as well or, did you just decide that converts were the better deal or just any more color you could give us there?
- Bruce Mackey:
- We think converts was the better deal, especially as they can be put to us on October 2013, deleveraging our balance sheet was really a big piece of that story.
- Jerry Doctrow:
- Then I would like a little more color on kind of the operational stuff. Staring with senior housing, the way I think of that, first of all, is you’ve got kind of same store, you’ve got a bunch of new acquisitions, new seasons and stuff you just bought. Within even the same store there’s obviously a mix of skilled and private pay. I was thinking more quarter-over-quarter and the bucket it the same, it looked like quarter-over-quarter there was a little bit of jump in units on the same store, like 44 units were added. Occupancy was down like 88.5 to 88. Did you actually expand something there quarter-over-quarter?
- Fran Murphy:
- We did have some new units come on line through expansions yes.
- Jerry Doctrow:
- Okay and was that really driving the occupancy or was it you were seeing deterioration?
- Bruce Mackey:
- No, I think you’re seeing a little bit of deterioration.
- Jerry Doctrow:
- The rate growth, it looked like you got more Medicare percentage, that the mix would rate great growth as well. So, I was really just trying to get a better feel for just on the private pay side what was going on with rates quarter to quarter there. Were they kind of flat, were they slipping a little bit? I’m trying to sort out what’s the Medicare impact from what the private pay impact is going to be?
- Bruce Mackey:
- Well as you know on the Medicare side we’ve the 3% bump effective 10-01. Private pay rates were up and they are slipping down from the rate increases that we’ve seen historically, but they’re still in the positive area.
- Jerry Doctrow:
- Okay and even quarter-over-quarter private pay rates would be up a little bit?
- Bruce Mackey:
- That’s correct, yes.
- Jerry Doctrow:
- Do you do most of them on January 1 or do you sort of just rotate it on the anniversary of whenever anybody comes in?
- Bruce Mackey:
- The majority of our contracts are on the anniversary date, however we almost really do it how the communities were acquired when we took them over. You’ve got a number of communities that do go January 1 and then you’ve got some communities that they have various dates throughout the year New Seasons is a lot like that. A lot of the New Seasons kind of go in the middle of the year.
- Jerry Doctrow:
- Okay so it may be up a little bit first quarter versus the rest of the year, but not dramatically so?
- Bruce Mackey:
- That is an accurate statement, yes.
- Jerry Doctrow:
- Okay and it looked like you had increase Medicare mix in addition. That was just really because the Medicare rate increase was sort of driving the revenue, it wasn’t like you were adding more Medicare beds, or was it a little bit of both?
- Bruce Mackey:
- No addition of Medicare beds, but I mean the census of Medicare patients was slightly higher in the fourth quarter but then it is predominantly the rate increase.
- Jerry Doctrow:
- If we can shift to the rehab hospital and the pharmacy a little bit. You were throwing a bunch of things out there and I’m just trying to get a simple sense of what those businesses might look like on a run rate basis go forward. I don’t know that I’ve quite dissected all of the fourth quarter numbers yet, but rehab hospitals you have 25, I think $0.3 million, the expenses were like $23.6 so there was a little bit of profit in those [interposing}
- Bruce Mackey:
- You really need to wait, we’re going to file the K probably on Monday, and you can see the segment reporting, because I gave an EBITDAM number in my prepared remarks. So, after rent the hospital’s lost about $1 million. In the fourth quarter that was the EBITDAM loss was about $1 million. You know we’ve got the new units and the new wings coming on line. We’ve got plans to add additional inpatient units, but these are long-term initiatives. We hope to see some improvements year-over-year in our hospitals, but I wouldn’t think it’s going to be a dramatic improvement, at least to start.
- Jerry Doctrow:
- So thinking of them as maybe break even for the year, starting off with perhaps a little bit, the loss, is that a little bit profitable. I mean it’s not going to be dramatic one way or the other, is that kind of what you’re thinking?
- Bruce Mackey:
- We’re driving to profitability, but it’s going to take several quarters.
- Jerry Doctrow:
- Pharmacy, again, there were some one-time charges. Could you maybe give any [interposing].
- Bruce Mackey:
- Correct. Pharmacy we lost again at that EBITDAM level about $550,000. Included in that was about $1 million of charges from prior quarters. So net we made maybe $500,000.00 of EBITAM, taking that into account, which is still low. I mean that’s a business that should be, again, historically we’ve guided people in that 5% to 6% range. Again, I think it is going to take us several quarters to get there with the addition of the new business and some initiatives we have in place to drive that margin for business. But, that is a small money maker for us. It is positive and I think it has opportunity for additional growth in the future.
- Jerry Doctrow:
- Okay but eliminating the one-time charge you’ve got a $500,000 positive and hopefully you build up a little bit from there as we go through the year?
- Bruce Mackey:
- That’s fair, yes.
- Jerry Doctrow:
- Do you have a maintenance CapEx number?
- Fran Murphy:
- Yes, Jerry, well 46% of the capital expenditures of $27.3 million in the quarter were for projects of $250,000.00 or more.
- Jerry Doctrow:
- Okay so it’s basically whatever the inverse of that is?
- Fran Murphy:
- Yes.
- Jerry Doctrow:
- Okay. You have referred a couple of times now to occupancy and where that could go. What we’ve been hearing from some of the other folks, I mean the calls are really just starting, was fourth quarter starting okay in terms of, again, really focused on private pay, move in, move outs, with the economy sort of falling off a cliff in November. A very ugly November and people feeling a little bit of recovery sort of January. Do you just have any feel for sort of market of what your people are telling you out in the field? Do you have any additional color as to what the backlog is, what your conversion rates are, how much move outs we’re having etc…
- Fran Murphy:
- I think it was at your conference where the new phrase was coined, the flat is the new up. I’ve heard that a lot actually, on your conference probably three or four times now, so it is definitely catching out there. It is a tough outlook; there is no question about it. We are hearing a lot of stories. We actually have all of our regional directors of operations in Korea meeting this week, just planning and getting ready for execution of a lot of these new programs we’ve talked about and how to drive occupancy. But, it’s not going to be an easy year. On the positive side, if I just looked at my January admissions to December, we had a net increase actually in the number of admissions coming through the door and we actually had less discharges, so far, through the end of January. That was a positive. February, so far, I gave the same store number. That’s come down a little bit through the Q1 seasonality. Most of it is related to our health care operations we’ve had in a number of buildings affected by the flu and things like that that have had admissions bans. But January didn’t look that bad on an occupancy front. Again, we’re still getting a lot of people through the door. The tours are there. A lot of people are still waiting to sell their houses and that’s a big issue, but they’re very interested in some type of option. We are admitting close to what we were in the past. Like I said, January we are actually up a little bit, which is a positive.
- Jerry Doctrow:
- The new stuff in the Carolina’s you’re taking up. Obviously they’re coming out of bankruptcy. Some of it had low occupancy. General problems people have with transition. Is that going to materially affect things one way or the other? Is there going to be a drag, is there break even?
- Bruce Mackey:
- No it’s probably close to a break even, at least where it was December and January. We’ve got some Cap x that needs to go into those buildings. We’ve probably got about a $2.5 to $3 million target that’s inline with what we originally thought when we took them over. That will happen between now and probably the first and second, maybe even into the third quarter. Then hopefully if this market might turn around we will see some traction there.
- Operator:
- Your next question comes from George Walsh with Gilford Securities.
- George Walsh:
- Bruce with the cap on insurance that took an impairment of $5.4 million on the quarter, could you just talk about the portfolio exposure there that you still see and what’s going on with the balance?
- Bruce Mackey:
- A lot of these are invested in preferred securities and a lot of financial institutions. We’ve got some REID exposure, utilities, a fair portion of utilities. The market unfortunately is down from 12-31-08, as we all know, there is potential future exposure. I do want to point out thought that all of these securities we have, almost all are still paying their originally stated dividend from years ago when they were acquired. So these are long-term investments. They always have been long-term investments. A lot of the losses were actually all ready reflected in the balance sheet. They are available from CS Securities, so any change in their value was previously tracked through the equity section of our balance sheet and we are really just moving that equity section to the P&L, Really just because they were there for so long, GAAP requires that we take an impairment.
- George Walsh:
- Okay and on the UBS line, the way that works, that 60% of the market value of the ARS’s that’s what is available?
- Bruce Mackey:
- That’s correct, so as that market value fluctuates our line capacity can fluctuate as well.
- George Walsh:
- Okay if it goes down, if you’re over drawn on it, so to speak, does that mean you have to pay down the line that you borrowed against?
- Bruce Mackey:
- Yes it does. As a point of reference, I believe the auction rate securities have actually increased in value in the month of January by about $4 million.
- George Walsh:
- And that line is, I think you pay one-year LIBOR plus about 50 basis points?
- Bruce Mackey:
- That was the maximum potential rate. It’s actually a no net cost line, so any interest that we would have earned on the auction rate securities is offset.
- George Walsh:
- So does that work out you use these finance the buy back in the convert so you get all that benefit of the interest cost reduction, there is no buy back?
- Bruce Mackey:
- Less any of the interest that we would have gained on the auction rate securities, which has been very minimal the last few quarters.
- Fran Murphy:
- Right I think the auction rate securities are yielding just over 1% right now.
- Bruce Mackey:
- So it is, not all, but very close to it.
- George Walsh:
- What is the net interest savings the way you’ve calculated so far, on the converts?
- Bruce Mackey:
- Close to 300 basis points, $1.7 million of interest on the converts.
- George Walsh:
- Okay, very good.
- Operator:
- Your next question is a follow up from Jerry Doctrow with Stifel Nicolaus & Company.
- Jerry Doctrow:
- Is the preferred stock in any harm or related entities or other things?
- Fran Murphy:
- Good question, Jerry. It is not.
- Jerry Doctrow:
- Okay, thanks.
- Operator:
- At this time there are no further questions in the question queue, so I will turn the call back over to Mr. Bruce Mackey for any additional or closing remarks.
- Bruce Mackey:
- Great, thank you for joining us on today’s call. We look forward to updating you on our progress in the future. Thank you.
- Operator:
- This does conclude today’s teleconference. Have a great day.
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