Five Star Senior Living Inc.
Q1 2013 Earnings Call Transcript

Published: 29 Apr 2013

[Operator:]

Good day, and welcome to the Five Star Quality Care First Quarter Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

[Tim Bonang:]

Thank you, and good morning, everyone. Joining me on today's call are Bruce Mackey, President and CEO, Paul Hoagland, Treasurer and CFO, and Scott Herzig, Chief Operating Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I'd also note that the transcription, recording, and retransmission of today's conference call is strictly prohibited without the prior written consent of Five Star. Before we begin, 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 other Securities Laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, April 29th, 2013. 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 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. And now, I would like to turn the call over to Bruce Mackey.

[Bruce Mackey:]

Great. Thank you, Tim, and thank you all for joining us on our first quarter earnings call. For the first quarter 2013, Five Star reported income from continuing operations of $0.05 per share. Results for the quarter included an income tax benefit of $1.5 million or $0.03 per share. Excluding non-recurring items, income from continuing operations was $0.02 per share. This compares to $0.03 per share for the same period last year. EBITDA, excluding non-recurring items, was $9 million flat with last year's first quarter. I would also like to note that our health insurance expenses during the first quarter were $1.8 million higher this quarter, compared to last year, due to an increase in the number of high cost claims. Paul will go into further detail on this later in the call. On past earnings calls, we've talked about what the key areas of success are for our business. To increase occupancy and rate, while holding labor, operating expenses and general and administrative costs in check. This quarter, we were successful in two of these areas. We controlled our labor and general and administrative cost, and most of our operating expenses, health insurance expense aside. However, total senior living occupancy was down 50 basis points from last year. While we expected and alluded to a seasonal drop in occupancy on our fourth quarter earnings call, we were disappointed with the year-over-year decline. Our health care cost should moderate going into next quarter, and the negative impact from a severe flu season has abated. But we appreciate that we need to do a better job growing occupancy. Increasing occupancy will be the biggest driver of EBITDA growth going-forward. Before I get into the highlights of the first quarter, I'll walk you through some of the significant changes we've made at Five Star. These are changes we began to implement in 2012 that equipped us with the right people and the right tools, crucial in our pursuit to grow occupancy. The most important component of success is having the right people in place. Two new members our of senior leadership team were put into place in the latter half of 2012, and at the beginning of 2013, and both are critical to our success. First, Scott Herzig was named Chief Operating Officer during the third quarter of 2012 and we're pleased with what he has done so far. A big focus of Scott is increasing the company's occupancy, and we're confident in his ability to lead our sales and marketing efforts. In his direction, we've already put into place new tools and processes, which I believe will have a significant impact on our overall sales culture. Second, we recently hired a new Vice President of Sales and Marketing. While recruiting for this position at the end of 2012, we were focused on candidates who were from outside the senior living industry, and who will bring new ideas to the table, and rethink our whole approach to sales and marketing. Starting in January of this year, Rob Poyas became our new Vice President of Sales and Marketing. Rob brings 18 years of experience from the hospitably and hotel industry, where he's served in various sales and revenue management positions at Starwood Hotels. He was the former Vice President of Sales Administration where he oversaw the sales operations of 170 hotels with nine different brands across North America. We're thrilled to have Rob on board, and are confident that the fresh perspective he's bringing to the position, will increase our ability to drive occupancy growth over time. We've already made important progress from a few key occupancy growth initiatives. First, our Customer Relationship Management system sales force, which is fully rolled out during the third quarter of 2012, has created new benchmarks and standards for our sales and marketing staff. We now have comprehensive measures on sales performance versus goals, lead tracking, and follow-up. We're able to be more responsive to our leads and regional personnel have the ability to track how quickly their communities are following up on leads. Management now has the ability to see how leads are being managed. Sales force is creating total transparency of our sales process. Building upon a successive sales force, we've made some additional enfacements. We automated our backend systems for processing leads from our website and third-party sources. This means that our sales staff spend more time working on leads, as opposed to [date of] [ph] entry. Second, we recently expanded our regional marketing and sales support by 20%, and also made some staffing changes at the regional sales level. We're currently trying to fill remaining open positions within our expanded sales team and we'll look to them to execute on sales and marketing initiatives to drive occupancy. Third, we recently made several enhancements to our website, which will improve our lead tracking capabilities, and search engine optimization. Over the last 45 days, leads coming from our website are up 25%. Fourth, we recently partnered with a new national referral agency, which we believe will start to gain traction during the second quarter, and will be a clear benefit over the long run. And last, but probably most important, we're beginning to redesign our sale teams’ compensation plans. These plans will provide higher compensation to increased occupancy results, and will move us towards a pay for performance sales culture. We're keenly focused on improving occupancy, and believe these initiatives will lead to meaningful occupancy improvement as we move through 2013. We continue to be encouraged by the positive outlook for the industry as a whole. Let's now look at the detailed results of our senior living business, which includes independent and assisted living communities, continuing care retirement communities or CCRCs, and skilled nursing facilities. For the first quarter, we reported $278 million of revenue, up 1% from last year, and $17 million of EBITDARM down 1.2% from last year. The decrease in EBITDARM is primarily driven by the year-over-year decline in occupancy and the temporary increase in healthcare cost that I mentioned previously. On a positive note, at our core independent and assisted living communities, EBITDARM increased by 3% and margins were up 60% basis points from last year. Moving on to our managed communities, we received $2.3 million of management fee revenue for the quarter, up significantly from the first quarter of last year, mainly due to growth from managed acquisitions. We currently manage 39 communities with 6,700 units. Occupancy for the quarter was 87.1%. On a same-store basis, revenues are up 3.6%, and EBITDARM is up 3.2% from last year. Moving on to the acquisition front, during the first quarter we entered into an agreement to manage an assisted living community with 93 units located in Georgia. We continue to look for opportunities to grow the company. We've the ability to lease or manage properties and also the capacity to purchase communities, when it makes sense. Our focus is on newer well run communities that are located in area, where we've a geographic concentration of operations. Over the last year or so, pricing has gotten expensive, cap rates have compressed, and newer product is becoming more difficult to find. We will continue to seek acquisition opportunities, but given the cap rate compression throughout the market, we're spending more time on ways to develop and expand our existing portfolio. We've been successful with this approach in the past, adding units to communities with occupancy is in the 90% plus range and taking advantage of the efficiencies of having services and staff already in place. We'll have more details on these opportunities later in the year. At this point, I'll turn the call over to Scott Herzig, our Chief Operating Officer, to provide more detail on our operating results during the quarter. Scott?

[Scott Herzig:]

Thank you, Bruce. Senior living occupancy for the first quarter was 85.4%, but down 50 basis points from last year. Occupancy at our independent and assisted living communities was at 88.0%, up 40 basis points from last year. CCRC occupancy was down 90 basis points from last year to 83.9%, and skilled nursing occupancy was down 260 basis points from last year to 79.0%. As of Friday, total senior living occupancy was 85.1%. On the skilled nursing side, our CCRC occupancy results continue to be affected by unfilled semi-private rooms. As I discussed last quarter, we're focused on renovating converting current semiprivate units in our CCRCs to Five Star branded Rehab to home units, which will be filled by more profitable short-term Medicare patient. These renovations include upgrading units to private rooms with updated bathrooms and private showers, flat screen televisions, high quality in-room dining services, and refurbished private rehab areas. We currently have three significant CCRC conversion projects going on right now in South Carolina, Wisconsin, and Kentucky, and have three more projects ready to commence later this year. Looking now at our standalone skilled nursing facilities. Total occupancy here continued to decline. We continue to see that the skilled nursing industry is experiencing some changes, and other alternatives for nursing care becoming more available, which places skilled nursing facilities in direct competition with places like assisted living facilities, home health, and other community based facilities, the likes of which we haven't seen in the past. To combat this, over the last few years we've spent capital at certain facilities to keep them competitive in their respective markets. In addition, last year, Five Star realigned its regional corporate structure to a create division solely focused on skilled nursing. This lowered some of our corporate overhead expenses, as well as created more focus and visibility on this business. In the end, a significant portion of our skilled nursing facilities are located in rural areas, with declining population, and this trend is a major factor in the overall decline in this business for Five Star. Over the last few months, we've started to see the emergence of new Accountable Care Organizations or ACOs in the few of our markets. As this program continues to grow, we will look for ways to partner with these groups, as there is an opportunity for quality operators such as Five Star with proven track records of positive patient outcomes to improve our skilled centers. Looking now at rates. This is one area, where we were successful during the first quarter. Senior living average monthly rates were up 2.5% from last year. Average monthly rates at our private pay independent and assisted living communities were up 2.1% from last year, and we still expect to grow rates by 2% to 3% on an annual basis in 2013. Rates of our CCRCs were up 2.2% compared to last year, and skilled nursing rates were up 5.8% compared to the same period last year. Starting October 1st, 2012, Medicare increased rates to skilled nursing providers by 1.8%. But the sequestration, which started April 1st, 2013, cut rates by 2%. So, essentially we expect Medicare rats to be flat in 2013. With that, I'll turn the call over to Paul Hoagland.

[Paul Hoagland:]

Thank you, Scott, and good morning, everyone, and thank you for joining us. I'll review our year-over-year quarterly financial results for the first quarter of 2013. Senior living revenues for the quarter were $278.2 million, up 1% from last year. This primarily, was a result of increases in our per diem charges to residents. Management fee revenues from the 39 senior living communities we manage were $2.3 million for the quarter, and these 39 communities are expected to generate $9 million of management fee revenue during 2013. Senior living wages and benefits for the quarter were $139.2 million and represented 50.0% of senior living revenues, a decrease of 20 basis points from last year. However, we did see an increase in employee health insurance cost of $1.8 million or 60 basis points, as a result of a number of large dollar claims during the quarter. We would expect to spend some moderate going into the second quarter. Also, as you know the Affordable Care Act will affect all companies of our size as 2013 ends and 2014 begins. We're working closely with our advisors to be as efficient as the world will allow in the implementation of this major change in the healthcare system. Other senior living operating expenses for the quarter were $69 million, up 3.5% from last year, but down sequentially by 1.5% from last quarter. As a percentage of senior living revenues, other operating expenses during the quarter were 24.8%, up 70 basis points from last year, but down 30 basis points from the fourth quarter of 2012. The year-over-year increase in operating expenses is due to the outsourcing of housekeeping and laundry services, which cost about $700,000, and was all set by lower wage cost. We also experienced increase cost associated with snow removal in winter conditions as the first quarter of 2013 was harsher than the previous year. Lastly, utilities seasonality, which increased cost by 60 basis points from the fourth quarter into the first quarter. Moving on to other income statement items. Our two inpatient rehab hospitals, which account for 8% of total revenue, generate $2.6 million of EBITDA during the quarter. These results are virtually even to last year. Although, revenues increased 2.6%, as occupancy increased to 63.7%, it was offset by seasonably higher utilities and snow removal cost. General and administrative expenses during the quarter were $15.1 million, down 2.1% from last year, and represent 4.2% of total GAPP revenues. If you include the total revenues from the 39 communities we manage, G&A was approximately 4% of revenues. Rent expense for the quarter was $50.9 million, which remained unchanged at 16.6% as a percentage of total senior living and hospital revenues. Interest expense for the quarter was $1.5 million and depreciation and amortization was $6.5 million. Our results for the quarter included a $1.5 million income tax benefit related to the work opportunity tax credit program, which expired in 2012, and was retroactively reinstated on January 3rd, 2013. For 2013, our annual effective income tax rate is estimated to be 31%. Now I'll review our liquidity, cash flow, and selective balance sheet items. Operating cash flows were $2 million for the quarter. During the quarter we invested $12.6 million of capital into our communities and sold $8.2 million of long-term capital improvements. At March 31st, 2013, we had cash and cash equivalents of $15.2 million. EBIDTA excluding non-recurring items for the quarter was $9 million, flat with last year despite the seasonal decline in occupancy, and an increase in our health benefit expense. In reviewing our balance sheet, our accounts receivable management remained well controlled. As of March 31st, 2013, the number of days sales outstanding for the consolidated operation was 17.5days. At the end of the quarter we had $333.8 million of net property and equipment, which includes 31 properties directly owned by Five Star, total which are encumbered by debt. We had $24.9 million of convertible senior notes and $46 million of mortgage notes payable, which includes $7.5 million within our discontinued operations. Our two revolving credit facilities are currently undrawn and have a total capacity of $185 million. At the end of the quarter, our leverage was 19% of book value and 12% of assets. We believe we are in compliance with all material terms of our credit, note, and mortgage agreement. At this point, I want to turn the call back to Bruce for a few closing remarks.

[Bruce Mackey:]

Great. Thanks Paul. In summary, our earnings this quarter were lower than expected. We were able to execute in a few areas. Average monthly rate was up 2.5% across our senior living portfolio. G&A represented 4.2% of total revenues, the lowest in the industry and EBIDTA was essentially flat with last year, in spite of lower occupancy and significantly higher health insurance expenses. I believe that the work we've done thus far and the people we've put into place are executing our plan to grow our companywide occupancy. Our focus remains clear. Grow occupancy, increase rates, and keep operating expenses and G&A in check. When we deliver on all these items, I'm confident that the true value of this company will be realized. With that Paul, Scott, and I would like to open it up for questions. Thank you.

[Operator:]

Thank you. (Operator Instructions) And our first question goes to the line of Darren Lehrich from Deutsche Bank. Please go ahead.

[Darren Lehrich:]

I just wanted to first start on the occupancy topic, and I just wanted to clarify what I heard. I think, Scott, you said occupancy stood at 85.1 on Friday. Is that -- can you just talk a little bit more about what you're seeing so far into Q2, and why you think occupancy continues to back up a little bit?

[Scott Herzig:]

We're starting to see some movement, a little bit of movement up in this quarter so far. Our leads are up; our discharges are down, we're starting to see some things move in the right direction. A lot of things come into play and we think we'll be all right this quarter.

[Bruce Mackey:]

Yeah, just to buttress that, I mean, we really and I did allude to it on the fourth quarter call, got hit with the flu real significantly in the first quarter. We often come back. Most of the flu was really gone, the effect of it, late February, early March, we still have a few communities that were impacted. But as of right now that's really for the most parts down and they're all admitting. Just to put a finer point, we actually had 30 communities that for various times up to a week or so could not take any residents in during the first quarter because of the flu, and residents were being discharged, and were passing away or moving on a lot high level care. And at the same time, we had the discharge was up, but we weren't admitting to those communities during that time. On a positive note our admissions were relatively flat quarter-over-quarter. But it really was the discharges that really got a hit pretty hard in the first quarter. And like Scott said that is definitely abating as we head into the second quarter. And we did see good occupancy growth at most of our IL/AL communities last year during the second and third quarter. So we expect that to repeat this year.

[Darren Lehrich:]

Okay. So you're expecting sequential occupancy improvement, I guess just starting off on a bit of a lower base at this point in the quarter. Is that correct?

[Bruce Mackey:]

That's correct, yes.

[Darren Lehrich:]

Okay. And then you mentioned just in terms of the referral agency relationship that you've made a change in, can you just talk a little bit more about that and how we should be thinking about the impact of that for you and how long that's been in place?

[Bruce Mackey:]

It had been in place that long. It started in the month of January and what we did is we engaged with a national referral company, Caring.com you can to website and take a look. And they're working with us, it was a tough transition for the first couple of month as referrals started flowing through Caring.com and on to us. We did notice a drop off in our results. It's quickly picked up. It's gotten lot better, I can tell you, I know some of the other large senior [operating] [ph] companies Caring.com really engaged with a number of people not just Five Star to start the year. And their referrals are getting better. We're getting more leads from them. Every month has gotten a little bit better but it was a tough transition to start but like I said it is getting better and I'll ask Scott --

[Scott Herzig:]

Well, the speed at which we're responding to leads is a lot better now. Bruce mentioned in his earlier comments with the sales force and it's just, we're getting better qualified leads from them now at this point. But, as Bruce said, it was a tough go for the first couple of months.

[Darren Lehrich:]

Okay. And then just tell me put that into perspective what portion of your referrals are coming from outside agencies like that and where do you think that might be able to move to?

[Bruce Mackey:]

It's a significant portion. Right now, our larger referral agencies you’re in the 30%, 40% range between that that referral agency and others I just mentioned. One of the biggest lead referrals sources continues to be our website, which is getting better and I alluded to that on my prepared remarks in terms of its quality, the leads coming in from the website, search engine optimization is really driving the number of leads. Referral is still our biggest place that we do get leads from, which is a great thing when our own, when family members existing residents refer over obviously it's a great word of mouth those referrals they don't pay for anything, most part they usually there might be some small incentive for the resident or family member, but it's nothing from what a third-party agency does charge us.

[Operator:]

Thank you. And next we'll go to the line of Daniel Bernstein from Stifel. Please go ahead.

[Dan Bernstein:]

I just want to go back to your comment about you're seeing cap rate compression may be turning a little bit more to internal investment. Does that imply that you don't have, you don't see a big pipeline of acquisitions to remain at the year or how should I think about that comment in terms of the cap rate compression?

[Bruce Mackey:]

Yeah, well, I know I said in my prepared remarks we got one community that we got under agreement right now to manage in the City of Georgia. It's late April that means we've done nothing so far. So, it's going to be a slow year for us. It's a fruitful year so far. We're working very diligent to find acquisitions and are hopeful that it will turn around in terms of us getting something. And that happens, I think 2009 started out to be somewhat of a slow year and that was the year, I'm sorry 2011, when we did [Bell and Vi] [ph] later on that year. But it was starting to flow, could that happen again. Sure. We’ve got the capacity, we got the relationship with senior housing, so they've got the firepower to get that done. And we're hopeful on looking. But as of right now, we don't see that and it's not anything that we're having under obviously agreement.

[Dan Bernstein:]

Is it the volume of deals that might be coming your way or is again the pricing is kind of turning you off?

[Bruce Mackey:]

It's a little bit of both in all honesty. I mean, there -- we were fairly busy at the NIC meeting few weeks ago, looking at certain things and people come with us with deals. They know we're going to be sub-6 cap rates and we just can't do it at sub-6 cap rates and so we saw a few with that. Well, we still look at deals every week. We probably get three or four deals in and we tour a couple of weeks. A couple of week might be a little bit of rest, but at least one or two a week in that regard. And like I said the one in Georgia came along and we've got at least site visit report that we're waiting (inaudible) right now on a few others, so we're hopeful. But getting back to what I said, we're starting to spend a little bit more time looking at our existing portfolio. We have a vast number or communities out there that we’ve got access to land on, that's in excess of 40 of our communities, and a number of those communities are doing very well in terms of occupancy. If you look at all our portfolio 226 probably that we approximately own or lease, of that number those are 90%, 95% occupied and have the room to grow and the market to grow. And we'll start looking at adding to those communities. We got a few that are in the early stages right now. We wrapped up two or three a year ago and we will definitely dedicate more resources to that project going-forward.

[Daniel Bernstein:]

Okay. And then in terms of the occupancy in the quarter particularly in the private pay senior housing side and I might have missed a little bit of the beginning of the earnings call, so hopefully I'm not asking you something that you already talked about. But can you talk about little bit about the sequence of occupancy through the quarter in January, February, March? It sounds like January and February were really tough quarters with the flu and then maybe it's rebounded some. But just give us a sense of how the quarter went in terms of occupancy or timing?

[Bruce Mackey:]

Yeah. Sure. It really started off early in the quarter. And early January is we really started to see the impact of the flu season. So we were kind of shutting down admissions. And discharges were going up early January, continued into February, but definitely by middle to the end of February it was slowing down a little bit. Really stabilized in March, again stabilized in April, but at the same point in time, we noticed our leads are up. For the last month, we had a good month in leads and I know that's a forward indicator of potential occupancy growth in the future.

[Daniel Bernstein:]

Do you have the quarter ending private pay occupancy?

[Bruce Mackey:]

No. I mean, we got the quarter ADC, but not the -- at the end of the quarter.

[Operator:]

Thank you. (Operator Instructions) And now we'll go to the line of Mike Petusky from Noble Financial. Please go ahead.

[Mike Petusky:]

Hey, Bruce, I think you characterized sales team comp change as the most important of those items you listed. Can you specifically say what change -- what it was and what it is now, what changes have been made?

[Bruce Mackey:]

We're in the process. I mean that was the one thing that I said during my prepared remarks that we hadn't fully implemented as of yet that we're really starting to redesign phase of it, and that's definitely something that Rob kind of brought to this table from his experiences in other industries organization. But, if you look at our sales staff, I'm going to ballpark the numbers. But if you know it's probably an 85

[Mike Petusky:]

Okay. I guess I know you guys don't really give real specific guidance going forward, but just generally, I mean, would you be able to sign-on to the idea of that that you would expect the first quarter will be a low watermark in terms of really EBITDA occupancy and most of the key metrics we talked about today?

[Paul Hoagland:]

Yeah, Mike. Good question. And if you look back at 2012, what you just asked is reality of what we experienced in 2012 Q1. For instance as we do finish Q1 and we're moving into Q2, obviously we can represent it, health benefits will definitely decline but we look at health benefits in Q1 of 2013, they were 3.9% of revenue of revenue. Last year, Q1 they were 3.3% of revenue, and for the full year last year they were 3.3%. Last year in the second quarter health benefits were 3.5%. So there, need to follow that same trending as 40 basis points. Utilities really kind of the same talk, in the fourth quarter utilities were 3.5%, first quarter 3.1% -- I'm sorry 4.1%, and last year they were 4.1%, last year second quarter was 3.5%. So again, a 50 basis point drop there. And then, we also have the payroll taxes associated with matching taxes, which in the first quarter this year they were 4.2% of revenue same as last year, but second quarter they dropped down by 60 basis points to 3.4%. So you take a look at those favorable trajectories. We expect Q2 will improve.

[Scott Herzig:]

Add on that a little bit occupancy growth that we hopefully talked about and may be the last thing and Paul you did mention in your prepared remarks is the snow removal. That was probably a couple of basis points as well that we saw in the first quarter that we don't expect in the second quarter.

[Operator:]

Thank you. And at this point we've no further questions. So, at this time, I'd like to turn back over to Bruce Mackey for closing remarks. Please go ahead.

[Bruce Mackey:]

All right. Great, thank you. And thank you all for joining us today. We look forward to updating you on our second quarter results later this summer. We're planning on participating in several upcoming investor conferences. The Bank of America Merrill Lynch Conference in Las Vegas, UBS Healthcare Conference in New York City, and Deutsche Bank Healthcare Conference in Boston, all of which are in May. We also are participating in the Jefferies Global Healthcare Conference in New York City in early June. We hope to meet many of you there. Until then, thanks again for your participation today.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You many now disconnect.