Five Star Senior Living Inc.
Q2 2013 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to the Five Star Quality Care Second 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 afternoon 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 would also note that the recording, transcription 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, July 29, 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 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 on any forward-looking statements. Now I would like to turn the call over to Bruce Mackey.
- Bruce J. Mackey:
- Great, thank you Tim and thank you all for joining us on our second quarter earnings call. The second quarter results showed signs of improvement over the first quarter of this year with EBITDA up 24%. We continue to make progress on several marketing initiatives and are encouraged by the start of a positive trend in occupancy we saw during the month of June that has continued into July. In the press release we issued late this afternoon, we also announced that we are marketing for sale 11 non-core communities, the majority of which are freestanding skilled nursing facilities whose results are now included in discontinued operations. I want to give a quick high-level overview of our results for the second quarter before going into detail on some of our initiatives and acquisition and disposition activity. Net income from June operations was $0.06 per share compared to $0.04 per share in the first quarter. EBITDA was $12.5 million, up 24% from the first quarter of this year. Senior living revenues were $269 million and total senior living labor and operating expenses were $196 million. We saw a nice improvement in total labor and operating expenses which were down 1.4% from the first quarter, with savings in labor and benefits driving most of that decline. Senior living EBITDARM was $73 million, a 3.5% improvement over the first quarter. Senior living occupancy for the first quarter was 85.5% and total private pay independent and excluding occupancy was 87.9%. Overall rates were soft this quarter as results included a 2% Medicare sequestration rate cut which began on April 1st. Private pay rate dropped 1.7% from the second quarter of last year. Moving on to our managed communities, we received $2.3 million of management fee revenue for the quarter which continues to be up on a year-over-basis, due to managed communities that we acquired since last year. Managed occupancy for the quarter was 87.4%. On a same-store basis compared to the second quarter of last year managed occupancy was up 340 basis points, revenue grew 4.8% and EBITDARM was up an impressive 10.2%. As I mentioned we were active on the disposition front this quarter. Upon review of the portfolio by our Board the decision was made to move 11 communities with 721 units into discontinued operations to be marketed for sale. Eight of the communities are skilled nursing facilities and the other three are assisted living communities. 10 of the communities are leased and one of the assisted living communities is on our balance sheet. These communities were either did not fit the criteria of what we consider to be a core asset or on a geographic location that made management difficult. Selling these communities will allow us to put more focus on our core business, which is operating private pay, senior living communities in areas where we have a geographic concentration. In addition at the end of April, we completed the sale of two skilled nursing facilities that have held in discontinued operations for some time. The percentage of revenues we received from residents' private resources is at an all-time company high of 76%. This figure doesn't take into account our managed communities which are also predominantly private pay. We have made great strides in increasing our private pay revenues over the last several years and will continue to do so going forward. On the acquisition front we started seeing more activity during the second quarter. We currently have four senior living communities under agreement to manage which we think that will close during the third and fourth quarters. These communities have a total of approximately 300 units and are located in Georgia and Tennessee. All of these communities are well run private pay communities in areas we have a geographic concentration. We also continue to source deals on a regular basis and are working diligently to add to our existing pipeline. We continue to evaluate opportunities within our existing portfolio for expansions and are on- track to have a few projects started by the end of 2013. I expect to have more details to share with you on our progress throughout the year. We are also making progress on our Rehab to Home Program. For those of you not familiar with Rehab to Home this is Five Star program that combines state-of-the-art nursing facilities and a high level of services located within our continuing care of retirement communities. We are upgrading a number of the skilled nursing units within our CCRCs where we feel this program will be a success. Just within the last few weeks we opened a new Rehab to Home Program unit in our Myrtle Beach South Carolina CCRC. Pictures of the unit are available on our website. The unit looks spectacular and the grand opening was well attended. We have two other projects underway that should be completed by the end of this year and we are evaluating future possible locations as well. At this point I will return the call over to Scott Herzig to provide more detail on our operating results. Scott?
- R. Scott Herzig:
- Thank you, Bruce. Senior living occupancy for the second quarter was 85.5%, down 50 basis points from last year. Private pay independent assisted living occupancy was 87.9%, up 20 basis points from last year. As I alluded to last quarter, our occupancy numbers were at their lowest point in March and in April following a tough flu season and a slow first quarter for move-ins. However we saw an inflection point in this trend during the latter part of May. Coming off the end of the second quarter and into July we are seeing continued improvement in our overall occupancy numbers. As of Friday total senior living occupancy was 86.2%, a 70 basis point improvement above the second quarter average. Senior living average monthly rates were up 80 basis points from last year. The 2% Medicare sequestration rate cut impacted our results this quarter, so overall rate curve was minimal. Rates at our private pay independent and assisted living communities were up 1.7% from last year. This was comparable to what the industry data showed for senior housing rate growth during the second quarter. During the second quarter we saw an overall increase in both leads and total move-in. Total leads were up from last year and from last quarter. Total move-ins were up 6.5% compared to last quarter and up 4% year-over-year. The referral source with the highest lead volume increase during the second quarter was our website where we saw average web leads up 38% compared with the first quarter. During the second quarter we also made good progress on our sales and marketing initiatives. To-date 90% of our regional sales positions have been filled and we are close to filling the one remaining open regional position. In total we have added three additional regional sales managers across the country so they can be better aligned with our Regional Operations Directors and so they can help to drive our sales initiatives at the local level. Also during the second quarter we began piloting a new results based commission program to select sales team throughout the company. Compared to our current compensation plan our new sales commission plan has higher level accountability for sales counselors but also includes a 40% incentive component which is much higher than the incentive portion of our current sales competition plan. And finally starting in August we will begin rolling out our [inaudible] advanced sales training program. This program will involve training all of our staff at the community level on Five Star's sales processes standard and external business development strategies. The last couple of months have shown small but steady growth in our occupancy numbers and we are anxious to continue to build on our strengthened sales platform. And with that I will turn the call over to Paul Hoagland.
- Paul V. Hoagland:
- Thank you, Scott and good afternoon everyone. Thank you for joining us today. I will review our year-over-year quarterly financial results for the second quarter of 2013. Senior living revenues for the quarter were $269 million unchanged from last year. Management fee revenue from the 39 senior living communities we manage was $2.3 million for the quarter and is on track with our expectation of exceeding $ 9 million during 2013. Senior living wages and benefits for the quarter were $130 million and represented 48.5% of senior living revenues an increase of 10 basis points from last year but a 140 basis points decrease from last quarter. The primary causes were a reduction in employee healthcare and the decrease in matching [form] factors. Other senior living operating expenses for the quarter were $66 million and represented 24.4% of senior living revenues, an increase of 70 basis points from last year. The year-over-year increase in other operating expenses is due to increased cost associated with outsourcing certain cleaning services which were offset by labor reductions and increases in operating supplies, proprietor fees and marketing costs. Compared to last quarter operating expenses declined 40 basis points, primarily due to the normal seasonal decline in our utility costs. Our two in-patient rehabilitation hospitals which account for 8% for total revenues generated $3.6 million of EBITDA during the quarter, an increase of $1.1 million from last year. Occupancy was 61.9% for the quarter, an increase of 210 basis points from last year and was a key driver to our performance improvement. General and administrative expenses during the quarter were $15.4 million, representing 4.4% of GAAP revenues and were down 40 basis points from last year. If you include the revenues in the 39 communities manage G&A is 4.1% of revenues on the year-to-date basis. Rent expense for the quarter was $50.9 million repressing 17.1% of senior living and hospital revenues. Interest expense for the quarter was $1.4 million and depreciation and amortization were $6.7 million which combined were unchanged from last year. Now we’ll review our liquidity, cash flow and selected balance sheet items. Operating cash flow was $6.6 million for the quarter. During the quarter we invested 13.7 million of capital in to our communities and sold 7.7 million of long-term capital improvements. At quarter end we had cash and cash equivalents of $19.3 million. EBITDA excluding non-occurring items for the quarter was $12.5 million, down 9% from last year but up 24% from last quarter. In reviewing our balance sheet our accounts receivable was 17.7 day sales outstanding for the consolidated During July, we redeemed the entire outstanding balance of $24.9 million of our convertible senior notes outstanding. We funded the redemption with cash on hand and $20 million from our line of credit. As of today, the balance on our line of credit has been reduced to only $10 million outstanding. At quarter end we had $331 million of net property and equipment, which includes 30 properties directly owned by Five Star, total which are unencumbered by debt. We had $37 million of mortgage notes payable and our debt to total book capital was only 17%. Following the redemption of our convertible senior notes in July, debt to book capital is now only 10%. Our two revolving credit facilities have a total capacity available of $175 million today. In closing we are encouraged with the recent positive trend in occupancy within our core line of businesses evidenced by the increase in occupancy today over the end of the second quarter. With our continued focus on improving our sales and marketing programs and culture we expect to see continued improvement over the next several quarters. In addition our divestiture of several non-core rurally located properties brings our focus and attention even more so on to the core private pay portfolio. The additional managed communities we expect to begin to manage later this year will also increase our management fee revenues to which there is a significant positive flow through. Thank you. We'd now like to open it up to questions to the audience.
- Operator:
- Thank you. (Operator Instructions). The first question is coming from the line of Darren Lehrich from Deutsche Bank. Please go ahead sir.
- Darren Lehrich:
- Okay, thanks. So good afternoon everybody.
- Bruce J. Mackey:
- Hi, Darren.
- Darren Lehrich:
- Hi there. So just a couple of things. First Bruce you mentioned, there is four communities that you will be assimilating in the first half and I guess could you just extend a little bit more the nature of those transactions; you'll be managing the facilities what I heard and one of them bought on balance sheet, just need a little bit more on what you are bringing on line there?
- Bruce J. Mackey:
- Sure. We've got four, well run higher end private pay communities that we will be managing on the assets senior living property struck during the third and fourth quarter. I think from a positive point, the other portfolio was fairy non-existent last I recall hence we've build a little bit of that up and we continue to solicit additional deals, so somewhat optimistic by the increased level of activity. Nothing on our balance sheet right now, but we still continue look and hope that we can get something at some point.
- Darren Lehrich:
- Okay and that's helpful. Then just as far as the sales go you obviously taking a number of properties here in this ops. I guess couple of things I wanted to ask, just in terms of the sale process who is driving that process, I guess is it safe to say it's SNH or how much involvement will you have in on the wholesale process. And on can you extend that -- you're not successful in selling them, at what point will you I guess bring them back in the continuing ops.
- Bruce J. Mackey:
- Okay. So two questions. I think the first -- really is at the start of the process, I can tell you that, I can tell you that Five Star is predominantly driving the process. We've got a mechanism that leads to sell properties that we feel make sense and we get reduction in our rent base from net sale proceeds that we delivered SNH so it's really in our purview to make sure we do a good job doing that and providing them to over to senior housing. If it's early in the process, like I said I think we're optimistic that some of these will go fairly quickly, some might take a little bit longer. But we are, we believe that we will sell all of them. that I think even updated timing is possible from will happens this year. But it's like where we are, end of July, the majority will probably take for the next year, early next year
- Darren Lehrich:
- Okay. And then I guess, we got some comments from Kevin, I'm sorry from David Hegarty on I guess maybe about a month or two ago and he mentioned that there were 48 properties and I am wondering how this number fits into that and whether there might be more that had been contemplated?
- Bruce J. Mackey:
- No, we are not contemplating any more at this point in time. We are going to see how this sale goes and if possible at the future we will really evaluate them but right now we are selling all of them?
- Darren Lehrich:
- Okay. And then just the last question I had maybe for Scott, the seasonal factors on occupancy you guys were pretty clear about that and we are now seeing some improvement maybe just some commentary from you, kind of a postmortem on the first half just what you have identified as maybe the some of the key challenges beyond just some of the seasonal factors that we have already heard about?
- R. Scott Herzig:
- Well, like we mentioned we had difficult time with the flu season, we slightly bottomed out at the end of the first quarter and into April but we have seen some nice movement up in the last couple of months with some of our sales and marketing activities really starting to come to fruition.
- Bruce J. Mackey:
- Yes, I think to add to that Darren, some of the things that we have done and just Scott is relatively new. He has only been here for a few quarters to be able to get his team in the place and then building that team up, I think it is a really big thing and the team has come online nicely and whipped in more and more things that I like in all honest each and every day in that marketing programs, so it is really building upon that. We knew this wasn’t a one quarter turnaround in our sales and marketing efforts it’s going to take a few quarters, we are pleased with the progress we are making so far. We know we have done a lot of progress to continue on down the road but really from where we stand right now it's certainly moving in the right direction.
- Darren Lehrich:
- Yes, okay. Well definitely it looks like you have made a lot of progress, thanks.
- Bruce J. Mackey:
- Thank you, Dan. We appreciate that.
- Operator:
- (Operator Instruction). The next question is coming from the line of Dan Bernstein with Stifel. Please go ahead.
- Daniel Bernstein:
- Good afternoon.
- Bruce J. Mackey:
- Good afternoon, Dan.
- Daniel Bernstein:
- Hi, I guess I am trying to understand the, little bit more on the occupancy pattern in the private pay senior housing side. Are you able to disclose where you ended the first quarter versus where you ended the second quarter? I am trying to understand how much occupancy actually ramped up in the second quarter?
- Bruce J. Mackey:
- Well, we haven’t disclosed that but there are a few data points that we have disclosed that should help you get there. When we did our first quarter earnings call we stated we were 85.1% on our first quarter earnings call. Now we move did a number of properties into discontinued operations probably count for 40-50 basis points somewhere in that range of occupancy. But we were on 85.5 at that point in time I don’t know the exact date, end of April. Today, like Scott said in his prepared remarks we're 86.2, where we are today. So we are up 60-70 basis points between really that point in time and today. And the same thing if you look at where we were the entire second quarter average again we were 85.5%, today we are 86.2%. So we are up 70 basis points based on both those data points and bullish about where we are going to continue to go from here.
- Daniel Bernstein:
- Okay. And I guess what I was trying to figure out is if you look at the NIC MAP industry data, independent living actually had declined in occupancy on the average from 1Q to 2Q. I was just trying to think if that was an average issue or if there was something else still impacting the second quarter like flu. But it seems like it’s a little bit more of just an average issue where you actually -- where the industry may have ramped up through the second quarter but the average still showed a decline, does that make sense or…?
- Bruce J. Mackey:
- I am trying to think how you call it, I mean the NIC…
- Daniel Bernstein:
- Yes the NIC data actually showed a decline in occupancy.
- Bruce J. Mackey:
- We saw that softness as well but I can’t tell you from what we have seen today definitely gotten a lot better and most of the leading indicators point to continued improvement.
- Daniel Bernstein:
- Okay. And on rate growth you had year-over-year rate growth of about 1.7% is it safe to say that your portfolio really doesn’t have a lot of pricing power and again in line with NIC MAP data you are really tracking more of the U.S. inflation rather than being able to push rate above that inflation point at this particular time?
- Bruce J. Mackey:
- For the most part, like you said we were kind of in line with the NIC MAP data on that. I expect us to get a little bit more bullish on rate into 2014 based on what we see with demographics again heightened occupancy, everyone is talking about growing rate growth, increasing rate growth in the future I think will certainly be there as well. Some other things actually these are small points but I think they were positive during the quarter. We saw a little of decrease in our concessions overall, if I look at Q2 and Q1 and Q2 this year, and Q2 last year those definitely seem to be moving in the right direction which is down. I think the other point of interest is our level of care. We will be doing a better job of capturing all that, we moved all our communities, we are just about there on to one platform and we’ve seen some improvements there. That will help us a little bit with rate growth this year. But the bulk of it will really come next year.
- Daniel Bernstein:
- And how does the third party referral expenses work in your P&L, is that in SG&A or is that run through the another expense line for the senior housing properties? Just trying to say, if you decrease your third party referral fees how is that going to impact, does that impact rate growth, does that impact something else?
- Bruce J. Mackey:
- Yes Dan, that does, that third party referral fees does enter into our G&A costing.
- Daniel Bernstein:
- Okay. And then one last question here. I am trying to understand the three senior housing properties that you are looking to sell or S&H is looking to sell, are those more Medicare and Medicaid dependent also, so higher level of Medicare, Medicaid in those as well or those private pay you are just generally (inaudible) the 10 properties you are looking to sale as being Medicare or Medicaid heavy?
- Bruce J. Mackey:
- No, those three are predominantly not Medicare or Medicaid, we just (inaudible) overall as predominant Medicare Medicaid.
- Daniel Bernstein:
- And are those properties losing money as well or…
- Bruce J. Mackey:
- They are challenged properties.
- Daniel Bernstein:
- Sorry?
- Bruce J. Mackey:
- I said they are challenged properties.
- Daniel Bernstein:
- Okay. That’s all for now. Thank you.
- Bruce J. Mackey:
- Okay, Dan. Thank you.
- Operator:
- And the next question is coming from the line of Mike Petusky with Noble Financial. Please go ahead sir.
- Michael Petusky -- Noble Financial:
- Hi, good afternoon guys. Hey, if you mentioned it I didn’t capture it and if it was in the release I didn't see it, so forgive but what were the revenues associated with the discontinued buildings and if you have that could you break up that by the skilled nursing as well as the assisted living?
- Bruce J. Mackey:
- We didn't issue it in the prepared remarks, it will be filed with our 10-Q although the break up probably won't be filed but the majority does come from our skilled but that we expect to file on Wednesday.
- Michael Petusky -- Noble Financial:
- Okay. Is there any way you could kind of just give around number on the aggregate?
- Bruce J. Mackey:
- I don’t think we can right now, I am sorry.
- Michael Petusky -- Noble Financial:
- All right and then on the rehab hospital is there anything to account -- I mean that seemed to have, that segment seemed to have the best quarter it had in a while is there anything that you guys would cite in terms of what was driving that other than I mean obviously I get the occupancy but what’s driving the occupancy what were you guys seeing?
- Bruce J. Mackey:
- I think that occupancy was up a little bit. We probably had some mix in terms of improvement as well on that, we’ll probably do bigger things.
- Michael Petusky -- Noble Financial:
- All right. And then Bruce I am always trying to kind of read fully between the lines on your comments on M&A are you saying you’re may be a little bit more bullish as you look out the next 12 to 18 months am I misreading this as I have occasionally in the past?
- Bruce J. Mackey:
- Sure I mean I know you and I discussed my comments last quarter and last quarter we didn't have a pipeline, today we do. So things are definitely improved now than they were. We continue to source deals and again we continue to look for managed opportunities as well as opportunities in our own balance sheet.
- Michael Petusky -- Noble Financial:
- Okay. And when you are talking about the pipeline you are saying that they are both managed as well as potential straight out purchases?
- Bruce J. Mackey:
- Correct, yes.
- Michael Petusky -- Noble Financial:
- Okay. All right, great. All right. Thank you.
- Bruce J. Mackey:
- All right. Thank you, Mike. Appreciate it.
- Operator:
- And at this time I would like to turn the call back to Bruce Mackey for closing comments. Please go ahead.
- Bruce J. Mackey:
- Great. Thank you James and thank you all for joining us today. We look forward updating you on our third quarter results in the fall.
- Operator:
- That does conclude our conference today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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