Five Star Senior Living Inc.
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day, and welcome to the Five Star Quality Care's Second Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kim Brown, Director of Investor Relations. Please go ahead.

[Kimberly Brown:]

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 would also note that the transcription, recording, and retransmission of today's conference call are 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, August 10, 2015. 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 statement. 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. Now, I would like to turn the call over to Bruce.

[Bruce Mackey:]

Great, thanks Kim. And thanks everyone for joining us on our second quarter earnings call. Second quarter revenue increased 2.8% primarily due to new acquisitions, as well as rate increases. Overall rate increased 1.2% with positive contribution coming from all property types and in particular from our private pay revenues which increased at or above our target range of 2% to 3%. However, our topline growth and bottom line results were muted as occupancy challenges remained throughout the quarter. Overall occupancy of 85.1% declined 70 basis points quarter-over-quarter and 40 basis points sequentially. The sequential decline was in line with Nic data and a seasonally typical, following the difficult flu season we experienced this year. Consistent with our first quarter and industry trends, we continue to experience high mortality rates and move-outs whether it is to residents need for a higher level of care. Skilled nursing in particular adversely affected our overall results and was the only property type to post a revenue decline year-over-year. Even with the declines in occupancy, we were still able to achieve slight increases quarter-over-quarter in community level operating results for full rent from our owned and leased independent and assisted living communities, as well as our continuing care retirement communities. Our current EBITDA for the quarter was $7.1 million and the current EBITDAR was $56.8 million. While this is a slight decline for the trajectory we were on, we expect to return to a more normal run rate given our expectations as occupancy will rebound in the second half of 2015. At June 30, the percentage of private pay revenues was 77.6%, an increase of 50 basis points compared to the second quarter of 2014. Our private pay acquisitions coupled with our strategic dispositions program has enabled us to drive this percentage higher over the years. Since the beginning of 2015, we've been very active on the acquisition fronts. On May 1, we begin to manage 14 high quality private pay senior living communities. These high end communities are part of a larger acquisition by Senior Housing Properties Trust of the senior living component of CNL Lifestyle properties. The 14 communities have approximately 900 assisted living units and are located across four states. This is the largest management deal Five Star has done with SNH since 2011 and we expect additional management fee revenues of approximately $1 million per annum. Since taking these communities over, our rebranding efforts are well underway, we retained key employees and we began rolling out Five Star programming. In addition to these 14 properties, at the end of May, we begin to manage another community SNH acquire in Georgia. This particular community has 40 brand new private pay independent living units and is adjacent to an assisted living and memory care community we currently manage, which will create positive synergies. And finally, we completed our diligence on an acquisition we expect to close on our own balance sheet during the third quarter. This acquisition is comprised of two communities with a combined total of 152 private pay independent living units located in Tennessee for approximately $26 million. Annual revenue is expected to be approximately $3.9 million, with a healthy EBITDAR contribution of approximately $2 million. We plan to remain active in sourcing private pay deals in 2015. We continue to make progress on our dispositions program as well. To-date we've sold nine communities, the majority of which were skilled nursing and we expect to sell the remaining two facilities in the second half of 2015. Now turning to an update on our rehab to home, and expansion projects. As you recall, rehab to home converts existing skilled nursing beds and our CCRCs to high-end private rehab suites. The two projects we have underway are scheduled to open during the second half of the year, one is in Kentucky and the other is in South Carolina. On the expansion front, we had two projects for additional 38 units in the CNL communities we began to manage on May 1. Both of these expansions came online in July and still provide additional management fee revenues. We have three other projects in process, which I have mentioned on previous calls, which are expected to wrap up soon, one in September and the other two at the start of 2016. These three projects will add a combined total of approximately 70 units split between assisted living and memory care. We currently operate high occupancies of these communities and as a result of our expansion investments, they will be better able to accommodate the market demand and drive EBITDAR at these communities. We’re actively evaluating additional rehab to home and expansion opportunities throughout our portfolio, and would expect to break ground on additional projects in the near-term. In summary, although following a tough flu season, which ultimately impacted our adjusted EBITDA and EBITDAR during the second quarter, we expect to regain our momentum and return to year-over-year growth in the second half of 2015. As Scott will outline in his prepared remarks, we continue to see robust move-in activity and assuming move-outs anticipate as we would expect, we’ll see solid improvement in our occupancy. Driving occupancy, pushing rates, maximizing the ROI in our programming, and controlling costs continue to be underlying driver to our strategy and ultimately our success. I would now like to turn the call over to Scott.

[Scott Herzig:]

Thank you, Bruce. I will start off with a review of rates before turning to occupancy. Overall single living average monthly rates increased 1.2% year-over-year in the second quarter. Looking at each portfolio, our private pay independent and assisted living provided the greatest contribution to rate growth as second quarter average monthly rates increased 3.8% at our owned single living communities and increased 2.0% at our lease to single living communities. Our CCRCs experienced very modest rate growth of 0.2% and skilled nursing increased 0.7%. We will continue to push rates throughout 2015 and expect our overall rate increases to come in at our target 2% to 3% for the year. Now turning to our second quarter occupancy results. I’ll provide a sequential comparison for each portfolio. For the second quarter of 2015, total single living occupancy declined 40 basis points to 85.1%. Occupancy at our owned independent and assisted living communities declined 80 basis points to 87.1%. Independent and assistant living occupancy at our leased communities decreased 30 basis points to 87.7%. Total CCRC occupancy declined 50 basis points to 83.3%. Our managed occupancy increased 10 basis points to 88.1%. And finally our skilled nursing facility reported occupancy of 78.4% down 20 basis points. Given the difficult flu season, we and others in the industry have experienced a share occupancy was challenging across all of our portfolio during the second quarter. Although moving activity continue to be robust up 3% year-over-year, it was not enough to offset our move-outs which were up 4%. Mortality rates and move-outs due to a need for a higher level of care were once again the biggest factors impacting our occupancy. We continue to see more of our resident move-ins come to us at higher level of activity and as such, staying for shorter periods of time. We’re seeing third-party Internet lead aggregated driving this higher activity resident and this is precisely why we are so focused on increasing our website leads and resident and professional referrals through our digital investment and marketing programs. These leads tend to stay with us longer and have the lowest acquisition cost. And the good news is, that year-to-date approximately 55% of our move-ins came from either our own website or resident and professional referrals and our goal is to continue to drive this percentage even higher. How do we tactically do this? As an example on our last call I discussed Lifestyle 360, our new activities program in which every Five Star community will offer daily activities or events, which have been thoroughly researched to ensure they have a positive outcome for the residents. The obvious outcome here is that our residents will enjoy better quality of life, which leads to more resident referrals. Our sales force loves this program, because it gives them yet another tool to help differentiate ourselves from the competition, demonstrate our dedication to the wellness of our residents, and ultimately create and convert more leads. And finally, the sales force is tasked with taking this step further calling on his or her network of professional referrals, educating them about the new program and inviting them to one of the events or activities of the communities. Early feedbacks have been extremely positive and we've seen healthy turnout to the events by our professional networks. Again this is just one example of the main things Five Star can do and go after the best possible leads. Our digital investments celebrity, chef food and dinning programs and signature experience training are a number of other ways we're improving our leads in overall resident satisfaction. And these efforts are having a positive impact. On a same-store basis, we are able to move-in 3.5% more residents in the second quarter of 2015 compared to the first quarter of 2015, and we had our best month of move-ins this July. Our same-store move-ins hit an all time high and we’re up 10% over July of 2014. And as a result, our occupancy at the end of July was 20 basis points higher than the second quarter of 2015. We’re encouraged by our sales numbers, which clearly show that our programming and sales efforts are paying off. I will now turn the call over to Paul.

[Paul Hoagland:]

Thank you, Scott, and thank you for joining us today. For the second quarter senior living revenues grew slightly to $277.9 million in the second quarter of 2015, an increase of $2.5 million compared to the second quarter of 2014, primarily as a result of a 2.4% increase in private pay rates in our IOL communities. Total senior living management fee revenues were $2.7 million for the second quarter, an increase of 11% compared to the second quarter of 2014, primarily due to the increase in the number of communities we manage which increased from 44 to 60. As a reminder, we added 14 managed communities on May 1, and received two months contribution to revenues during the quarter. We're pleased that our management fees continue to grow and we expect to generate approximately $11 million annually or manage the fee revenues. Senior living wages and benefits for the quarter were $136.4 million, an increase of 1.6% compared to the second quarter of 2014, primarily due to annual wage increases and increases in employee health insurance cost during the period. At 49.1% of comparative senior living revenues, senior living wages and benefits were inline with our expectations and remain well controlled. Other senior living operating expenses were $71.2 million, which included $1.3 million of legal and consulting cost incurred related to the skilled nursing compliance matter at one of our communities. When adjusted for that, they were 25.2% a decrease of 30 basis points from the second quarter of 2014 primarily due to decreased cost associated with reduced utility expense and reduced bad debt expense. The company continues to experience good results from its focus on reducing its bad debt exposure. General and administrative expenses were $18.2 million for the quarter, and included $500,000 of non-recurring, legal and compliance costs. There was also $400,000 in Board expenses which occurred during the second quarter of 2015 versus the third quarter in 2014. G&A cost remain well controlled and for the second quarter were 4.7% when adjusted for the above of total revenues under management. Rent expense for the quarter was $49.7 million, or 17.9% compared to senior living revenues and as a same percentage of last year during the second quarter. Interest expense was $1.1 million and depreciation and amortization was $8.1 million for the quarter. EBITDA excluding nonrecurring items was $7.1 million for the quarter compared to $8.9 million in the second quarter of 2014. The decline was primarily related to the 70 basis point decline in the overall occupancy. Recurring EBITDAR was $56.8 million for the quarter and is $116 million for the first half of 2015, a 6% increase compared to last year. Now I will review our liquidity, cash flow and selected balance sheet items. Cash flow from operating activity was $8 million for the second quarter of 2015. We invested $13.6 million of capital into our communities and sold $4.8 million of long-term capital improvements. At quarter-end, we had $22 million of cash and cash equivalents. At quarter-end, we had $357.1 million of net property and equipment, which includes 31 properties directly owned by Five Star, 12 of which are unencumbered by debt. At quarter-end, we had $35 million outstanding on our two credit facilities and $44.7 million of mortgage notes payable. During the quarter, we repaid an outstanding mortgage balance of $4.9 million that had an 8.99% interest rate on one of our communities. We are currently at $30 million outstanding, out of our total availability of $175 million. In April, we extended our $150 million facility for one year and our option can extend it for one more year to April 2017. At the end of the quarter our leverage was 27% of book capital and 15% of assets. We believe we are incompliance with all material terms of our credit, note, and mortgage agreements. With that Bruce, Scott, and I are happy to take your questions. Thank you.

[Paul Hoagland:]

Great. I'd like to thank you all for joining us on our second quarter earnings call. We look forward to updating you on our progress on future calls.

[Operator:]

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