Five Star Senior Living Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good morning, and welcome to the Five Star Quality Care's Third Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Kim Brown, Senior Vice President. Please go ahead, sir.

[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, November 6, 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 or SEC regarding this reporting period. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. Now, I would like to turn the call over to Bruce.

[Bruce Mackey:]

Great, thanks Kim. And thanks everyone for joining us on our third quarter call. Our third quarter results were highlighted by a 44% year-over-year increase in adjusted EBITDA which returns us to the more normalized $9 million plus range per quarter that we like to see and also 5.5% year-over-year increase in adjusted EBITDAR. Our stronger operating results were the result of increased private pay rates as well as solid expense controls. Before I get into the details of our results, I do want to highlight that during the quarter we recorded a non-cash goodwill impairment charge of $25.3 million or $0.52 per basic and diluted share. As part of the preparation of our 2015 third quarter financial statements, we determined that, as a result of the significant decline in our stock price subsequent to the announcement of our financial and operating results for the 2015 second quarter and the overall decline in values of other comparable publicly traded senior living operating companies, potential indicators of impairment existed and an interim assessment of goodwill for impairment should be undertaken. Upon completion of this interim assessment, we recorded this non-cash charge for goodwill to reduce the carrying value of our goodwill to zero. I want to emphasize again that this impairment charge was a non-cash charge taken during the third quarter. Now looking at the results, loss from continuing operations for the third quarter of 2015 was $26.3 million or $0.54 per basic and diluted share. Without the effect of a non-cash goodwill impairment charge I just mentioned of $0.52 per basic and diluted share, Five Star reported a third quarter loss from continuing operations of $0.02 per basic and diluted share. This is a significant improvement over the second quarter loss from continuing operations of $0.07 per basic and diluted share as well as the third quarter 2014 loss from continuing operations of $0.05 per basic and diluted share. Third quarter revenue increased 0.8% primarily due to increases in average monthly rates to residents who pay privately for services, partially offset by decreases in occupancy. Average monthly rate at owned and leased senior living communities increased 1.7% with positive contribution coming from all of our leased property types. Growing occupancy continues to be a challenge for the senior living industry. At Five Star occupancy in the third quarter at owned and leased senior living communities decreased by 110 basis points to 85% from 86% -- to 85% from 86.1% for the same period in 2014. However, we were down only 10 basis points in total from the second quarter of 2015 and we saw increases in our leased independent and assisted living communities as well as our skilled nursing facilities. At September 30th, the percentage of private pay revenues was 78%, an increase of 30 basis points compared to the third quarter of 2014. Our focus on private pay acquisitions, coupled with our continued execution on our strategic dispositions program has enabled us to drive this percentage higher over the years. On the acquisition front, in November 2015 we acquired two private pay independent living communities with a combined total 152 living units located in Tennessee for $26 million excluding closing costs. We funded the acquisition with cash on hand and by assuming $17.3 million of mortgage debt. Annual revenue is expected to be approximately $3.9 million with a healthy EBITDA contribution of approximately $2 million. This acquisition fits our criteria of being private pay, located in a geographic area where we have a strong operational presence, strengthens our balance sheet and is accretive to earnings. We continue to make steady progress on our dispositions program as well. In July and August 2015, Five Star and Senior Housing Properties Trust, or SNH, sold two skilled nursing facilities located in Iowa and Wisconsin with a combined total of 51 living units for approximately $1 million. As a result of these sales, Five Star's annual minimum rent payable to SNH decreased by $100,000 in accordance with the terms of the applicable lease. To-date we have sold 10 communities, the majority of which were skilled nursing facilities and we expect to sell the remaining two facilities in the first quarter of 2016. As of today Five Star continues to market for sale one community it owns with 32 living units and Five Star and SNH continue to jointly market for sale one community that Five Star leases from SNH with 116 living units, each of which are reported as held for sale and are included in discontinued operations in Five Star's financial statements. Now turning to an update on our rehab to home and expansion projects. As you will recall rehab to home converts existing skilled nursing beds in our CCRCs to high-end private rehab suites. We recently completed one project in Kentucky and are having an open house next week. The other project we have underway in South Carolina got pushed back a bit and is now scheduled to open at the end of the first quarter in 2016. On the expansion front we inherited two projects for an additional 38 units for the CNL communities we began to manage on May 1st. Both of these expansions came online in July and should provide additional management fee revenues. These projects aren't still up now. We have three other projects in process, which I have mentioned on previous calls, which are expected to wrap up soon. Additionally construction was just completed at one expansion in Texas and we are waiting the Certificate of Occupancy. Pre-leasing activity at this expansion community has been strong. The other two projects are still on track at the start of 2016. These three projects will add a total combined approximately of 70 units split between assisted living and memory care. We currently operate high occupancies at 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, during the third quarter, Five Star's solid expense controls, balance sheet strength and progress on construction initiatives led to much improved sequential and year-over-year performance. Moving to the end of 2015 and into 2016, we will rely on these areas of strength as we push through the profitability through occupancy and rate increases and holding expenses steady. 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 senior living average monthly rates increased year-over-year in the third quarter and looking at each portfolio our private pay independent assisted living provided the greatest contribution to rate growth as third quarter average monthly rates increased at our owned senior living communities by 3.6% and increased 2.5% at our leased senior living communities. Our CCRCs experienced very modest rate growth of 0.2% and skilled nursing rates increased by 1.4%. We will continue to push rates throughout the remainder of 2015 and expect our overall rate increases to come in at our target of 2% to 3% for the year. Now turning to our third quarter occupancy results. I will provide a comparison for each portfolio. Year-over-year for the third quarter of 2015, total senior living occupancy declined 110 basis points to 85.0%, although total occupancy was only down 10 basis points from the second quarter. Occupancy at our owned independent assisted living communities declined 190 basis points to 86.3%. This is primarily related to a significant renovation project at one of our Indiana communities that has disrupted operations but should be completed in the fourth quarter. Independent assisted living occupancy at our leased communities decreased 170 basis points on a year-over-year basis to 87.8%, but actually improved sequentially over the second quarter by 10 basis points. Total CCRC occupancy declined 40 basis points to 82.8%. Our managed occupancy increased by 70 basis points to 87.5%. And finally occupancy at our skilled nursing facilities was 79.3% which is flat from last year. Total current occupancy is 85.0%. Although moving activity continues to be robust up 4% year-over-year in the third quarter, it was not enough to offset our move-outs. Mortality rates and move-outs due to a need for higher level of care were once again the biggest factors impacting our occupancy. Even with the increased move-outs we saw -- we still felt plenty of moving activity for the quarter and were able to improve rates and avoid the level of discounting that some of our competitors have accepted. Also as a result of the higher level of acuity we saw our level of care revenue increased by 4% for the quarter over the last year and is an area we would most likely continue to see grow over the ensuing quarters. Growing occupancy continues to be significant focus for the company. Over the last five weeks we have embarked upon our most aggressive sales campaign in company history. During this time period we logged over 20,000 sales calls involving all levels of the organization and calling upon our top referral sources to enlighten them regarding our signature resident program Lifestyle 360. This campaign just wrapped up but already we have seen an increase in the number of leads from professional sources. And just by way of reminder professional referrals are of significant importance to us as they convert at the highest rates, have one of the higher length of stay and have one of the lowest cost of sales. We also continue to set the bar extremely high in our food and dining program with our ongoing relationship with celebrity chef Brad Miller. Under chef Brad's direct oversight we have now trained and certified over 110 of our community chefs in the Five Star Culinary Institute, which focuses on educating and training to deliver the best and most satisfying meals to our residents in the most energizing environment possible. This program continues to highlight our focus on enhancing our resident's food and dining experiences and continue to be a showcase of what we can do different and better than the competition, thus ultimately leading to higher occupancy. On the clinical front, I am pleased to announce a large step forward in our push to become fully electronic with our medical records as we have now fully implemented electronic medical records at our first Five Star community in Scottsdale, Arizona. Electronic medical records have many documented benefits, not the least of which are continuity of care and the significant reduction in the documentation errors. But it also creates efficiencies across all of our lines of business and improves our communication between hospitals and our physician groups. Based on the successes at our Scottsdale community, we have planned to convert more communities in the first quarter 2016 and will push to be fully electronic company-wide in the near future. I will now turn the call over to Paul.

[Paul Hoagland:]

Thank you, Scott, and thank you for joining us today. For the third quarter senior living revenues grew to $279.7 million, an increase of $2.3 million compared to the third quarter of 2014, primarily as a result of a 2.7% increase in private pay rates in our IOL communities. Management fee revenues were $2.7 million for the third quarter, an increase of 11% compared to the third quarter of 2014, largely due to the increase in the number of communities we manage which increased from 44 to 60. We expect that our 2015 management fee revenue will be just under $11 million for the full year. Senior living wages and benefits for the quarter were $135.1 million or 48.3% of senior living revenues, a decrease of 50 basis points compared to the third quarter of 2014, which was 48.8%. At 48.3% the senior living revenues, including wages and benefits were in line with our expectations and remain well controlled. Other senior living operating expenses were $72.6 million, which included $900,000 of legal consulting costs incurred related to the skilled nursing compliance matter at one of our communities. When adjusted for that they were 25.6%, a decrease of 10 basis points from the third quarter of 2014. General and administrative expenses were $16.6 million for the quarter and were 4.5% of total revenues under management. This compares favorably to the prior year by 50 basis points, primarily due to decreased expenses for accounting restatement costs, forward costs which occurred in the second quarter of 2015 and reduced legal expenses. Rent expense for the quarter was $49.7 million or 17.8% of comparative senior living revenues and is the same percentage of last year during the third quarter. Interest expense was $1.1 million and depreciation and amortization was $8.4 million for the quarter. As Bruce previously discussed, the company recorded a non-cash goodwill impairment charge of $25.3 million in the quarter. Adjusted EBITDA excluding nonrecurring items was $9.2 million for the quarter, a 44% increase over the third quarter of 2014. The increase was primarily due to private pay rates increase in expense management. Year-to-date adjusted EBITDA was $26 million, an increase of 44% when compared to the prior year. Adjusted EBITDAR was $59 million for the quarter, an increase of 5.5% over the previous year and $175 million for the first nine months of 2015, a 5.5% increase compared to last year. We have managed our margins and flow through capture well. Now we will review our liquidity cash flow and selected balance sheet items. Cash flow from operating activities was $11.7 million for the third quarter of 2015. We invested $15.7 million capital into our communities and sold $7.5 million of long-term capital improvements. At quarter end we had $19.8 million of cash and cash equivalents. We had $354.5 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 $42.9 million of long-term mortgage notes payable. We are currently at $35 million outstanding out of our total availability of $175 million. At quarter end our leverage was 29% of book capital and 16% of assets. We believe that we're in compliance with all material terms of our credit, note and mortgage agreements. With that, Bruce, Scott and I are happy to take your questions.

[Operator:]

[Operator Instructions] Our next question will come from Brian Tanquilut from Jefferies. Please go ahead.

[Brian Tanquilut:]

Just the first question on occupancy [that you obtained] sequentially. Just wanted to hear your thoughts on what the drivers are for the sequential weakness? And also tying that into your views on the industry construct -- new construction in the industry. We have heard a lot of noise about that. So I just wanted to see if you thought that was impacting your occupancy or if there are other factors driving the sequential weakness.

[Bruce Mackey:]

No. I don’t think construction is playing a huge part right now. It's possible at some point in the future obviously construction is up and its going to impact at some point a little bit everybody. But on construction we've seen over the years in a number of our markets come online is making sure that our buildings are in good capital shape to withstand that new construction. For the most part, again, as Scott highlighted, we saw the robust move-in activity continued as we have seen throughout the entire year. We are up 4% year-over-year in same store for our movement. We did see growth in our leased independent assisted living occupancy. We saw a little bit of weakness in our owned independent assisted living and in terms of occupancy, now it's primarily one property that we saw a sizeable decrease and that was still of a construction project that was going through the other pipeline that's been wrapped up. So I really can't say construction is playing too much of a piece right now in terms of raw occupancy.

[Brian Tanquilut:]

Then in terms of -- just trying to drive that up. You highlighted Lifestyle 360 and all these other initiatives. I mean, should we -- based on what you are seeing today over your outlook for the next several quarters and how are you thinking about occupancy trends going forward given just like you said, you are seeing robust move-ins?

[Bruce Mackey:]

The Nic was up 20, we were down 10, but like I said we did track close to the NIC in some markets, not so well in other markets. I think overall we should be relatively close to what the NIC is going to do.

[Brian Tanquilut:]

And then from a cost inflation perspective I was just wondering if you guys are seeing any unusual or the start of accelerating cost inflation in your facilities?

[Paul Hoagland:]

No. From a cost standpoint we continue to manage margins well but we also as a function of increasing our size and leverage we continue to buy more efficiently. But just throughout a couple of big statistics, year-to-date our wages and benefits are 20 basis points below last year's 2014. Our food year-to-date and again we have been focusing very heavily on improving the food delivery to our programming. Food is up 1.5%. So we are actually trending below the outside inflation and we are improving the level and quality of food. Utilities are flat three-tenths of a point. And then I think you can -- probably the best way to capturing it is if you look at our other operating expenses which are call it 25% to 26% of our P&L, year-to-date I took a basket of half of the big items and we are up three-tenths of a point. So again we have been able to manage our costs well and I think that we will continue to find ways of finding opportunities to defend inflation. Certainly our pricing as evidenced by the results in Q3, our pricing -- our private pay portfolios has more than offset any cost increases.

[Brian Tanquilut:]

Got it, Paul last question. Is there any nonrecurring items that need to be highlighted for this quarter? I know we had some in Q2, so just want to make sure that there is nothing that we haven't discussed yet.

[Paul Hoagland:]

We have outlined in on Page 7 of our press release and all of our operating expenses that are in Q3 are at the normalized range. So again a pretty quiet quarter from the standpoint of cost movement.

[Brian Tanquilut:]

Got it. Thank you.

[Operator:]

Our next question will come from Daniel Bernstein of Stifel. Please go ahead.

[Dan Bernstein:]

I just wanted to polish off the occupancy a little bit further. Are you able to give us numbers for occupancy of the portfolio if you excluded the properties that where you have disruptive projects? Was just trying to understand -- was the bulk of the portfolio occupancy higher, if you excluded those properties and do you have any specific detail [indiscernible]?

[Bruce Mackey:]

I can’t put a number to it right now. Maybe we can come back on it on future calls. But sure, obviously there is something there. I mentioned the project in our owned -- our owned independent senior living communities that was down significantly because of the project. Also our CCRCs was down a little bit as well and we probably had, I don’t know, roughly 30 units in two properties that were offline during the quarter. So, yes, that does have a little bit to do with it.

[Dan Bernstein:]

I think having a specific number excluding those disruptive properties would be very good and helpful. And then also in terms of if we move back to the competition question, are you expanding any CapEx projects or try avoiding CapEx projects based on competition you are seeing? Just trying to understand if we are going to see some of the CapEx numbers pick up in the next year or two in response to -- again maybe not catastrophic supply but just an increase in supply and competition?

[Bruce Mackey:]

Yes. I don’t think it will be a huge amount, because like I said we have been dealing with new supply coming online in a number of our markets ever year as far back as we can see. So it is always happening. I know in Texas impact for example, Texas is a hot button. We have ramped up a CapEx project at one community but that's just one example out of 250 communities. I do think our expansion capital that I talked about in my prepared remarks, we have got 70 units coming on line, that would be more of a driver of capital than kind of remodeling if you are to get ready for new construction.

[Dan Bernstein:]

On the expansion projects, are you able to quantify what you expect your IRRs and increases in revenue EBITDAR cash flow might be as a result of those projects assuming they stabilize?

[Bruce Mackey:]

It's going to be significant. I know in past investor relations presentations we have had slides on some of the projects that we've done in terms of additions and that these have been to drive I'd say from a capital flow through, it sounds like 50%, Paul from that range. So it's the flow through on some units. It's going to be pretty nice.

[Paul Hoagland:]

And keeping in mind that somewhere in the vicinity of 60% of the capital that we have spent on the expansion front, we sell that capital and then we obviously pay increased rent and part of the analysis that we go through is we typically when we pro forma out, we will typically be getting 3 to 4 times the rent increase if you will and increased EBITDAR. So again the projects are very healthy from a standpoint of return.

[Dan Bernstein:]

So maybe that's the rule of thumb to think about is, the amount of CapEx times, I think this is what an 8% rate I think you are paying?

[Paul Hoagland:]

Correct.

[Dan Bernstein:]

So you guys end them in both quite up by 3 or 4 and that's probably the EBITDAR increase.

[Paul Hoagland:]

And that's fair.

[Dan Bernstein:]

Over a couple of quarters.

[Bruce Mackey:]

Yes. It will be up.

[Dan Bernstein:]

Then you are also generating a pretty significant level of cash flow beyond that. You bought two properties I think I saw in November which we think that's a very good strategy. What else do you have in the pipeline in terms of acquisitions? And how do you rank allocating money towards say additional expansions in CapEx versus acquisitions at this time?

[Bruce Mackey:]

While, you did mention it we have done a good job on the cash, if you look at capital allocation on a fairly regular basis. Right now we've got a fair amount of capital that's going to be allocated both towards remodeling as well as expansions. So the pipeline right now is a little leaning. With cap rates where they are right now, it's tougher for us to compete at this level. Not to say we are not going to look, but again that's probably not a huge part of the story in the next couple of quarters.

[Dan Bernstein:]

That's real helpful color there. I think that's all for me. I will hop off.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bruce Mackey for any closing remarks.

[Bruce Mackey:]

Great. Thank you. I want to thank you all for joining us on our third quarter earnings call and I look forward to updating you on our progress on future calls. Thank you.

[Operator:]

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