Five Star Senior Living Inc.
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

Good morning and welcome to the Five Star Quality Care Fourth Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Bonang, Senior Vice President. Please go ahead, sir.

[Timothy Bonang:]

Thank you and good morning everyone. Joining on today's call are Bruce Mackey, President and CEO; and Rick Doyle, Treasurer and CFO; as well as 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, March 2, 2016. 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. And now, I would like to turn the call over to Bruce.

[Bruce Mackey:]

Great. Thanks Tim. And thanks everyone for joining us on our fourth quarter and year-end call. Earlier today, we reported a loss from continuing operations for the fourth quarter of 2015 of $0.13 per share, compared to a loss from continuing operations of a $1.46 per share for the same period in 2014. However, without a litigation settlement charge as well as some other one-time items that we will address later in the call. Loss from continuing operations would have been $0.03 per share for the fourth quarter of 2015. The fourth quarter 2015 adjusted EBITDA increased by 1.5% over the adjusted EBITDA realized in the same period in 2014. Our improved results were primarily due to average monthly rate increases of 1.6%, management fee revenue increases of 13% over the same period in the prior year and continuing operating expense controls. Fourth quarter revenue increased to 2.4% primarily due to increases in average monthly rates to residents who pay privately for services and the non-recurrence of a $4.3 million revenue reserve recorded in the 2014 period for historical Medicare payments we received and expect to repay in connection with a Medicare compliance assessment at one of our skilled nursing facilities. The average monthly rate at owned and leased senior living communities increased 1.6% with positive contribution coming from all of our property types. Growing occupancy continues to be a challenge for the senior living industry. Occupancy in the fourth quarter at owned and leased senior living communities decreased by 120 basis points to 85% from 86.2% from the same period in 2014, but was flat sequentially at 85%. Scott will get into details in a minute, but we did see sequential gains and occupancy in our independent and assisted living leased portfolios as well as our leased continuing care retirement communities. While our overall occupancy lagged slightly behind the NIC MAP Data for the second half of 2015, we believe the programs that we’ve put in place to drive occupancy over the last several years will have a positive impact on a long-term outlook in occupancy here at Five Star. At December 31, the percentage of private pay revenues was 78%, an increase of 50 basis points compared to the fourth 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 combined total of 152 living units located in Tennessee for $26.2 million excluding closing costs. We funded this acquisition with cash on hand and by assuming $17.3 million of mortgage debt. Annual revenue was 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 the strong operational presence, strengthens our balance sheet and is accretive to earnings. We continue to look at communities that fit our acquisition criteria. On the disposition front, in December 2015, Five Star and Senior Housing Properties Trust, or SNH, sold a small skilled nursing facility. Since we began our strategic disposition program, we have sold a 11 communities, the majority of which was skilled nursing facilities and we expect to sell the remaining facility in 2016. Now turning to an update on our Rehab to Home and expansion projects. As you recall Rehab to Home converts existing skilled nursing beds in our CCRCs to high-end private rehab suites. We are still making progress on our project in South Carolina and we have just added a project in Indiana. We will start another Rehab to Home project in Arizona in the next month and we have two other projects that should later in 2016 as well. On the expansion front, we opened up an 18 unit expansion at an assisted living community in Texas. We are in fill-up mode at that expansion now. We are also very close to opening up another 50 units in Tennessee and Maryland. These are mix of assisted living and memory care. We are close to start a construction on a 48 unit memory care building that will be located next to CCRC we operate in Delaware. In addition, later this year, we expect to start construction of a 100 unit independent living community that will be located right next to an existing 88 unit assisted living and memory care community, we operate in Tennessee. Both of these large projects will likely take 18 or more months to complete. We are still evaluating other expansions at existing communities as well. I want to discuss a recent announcement of our settlement of a lawsuit filed against us by the estate of a former resident of one of our senior living communities. In May 2015 a judgment was rendered in the Company’s favor on the wrongful death claim, and against the Company on the remaining claims and damages of approximately $19.2 million were awarded to plaintiff. We reached a settlement with the plaintiff for approximately $7.3 million in exchange for a customer release. I would note that Five Star did not admit to, and specifically denied, any and all liability, wrongdoing, responsibility or fault relating to the claims. Five Star’s liability insurer has agreed to reimburse the Company for $3 million of the approximately $7.3 million settlement amount. We believe our liability insurer maybe financially responsible for more than $3 million and we are seeking additional payments from them. However, we cannot predict the outcome of any future negotiations for our litigation. As a result, we recorded an approximately $4.2 million litigation settlement charge for the year ended December 31, 2015, which is included in other senior living operating expenses in our consolidated statements of operations. We’re glad to have this litigation settled and behind us at this point. In summary, during the fourth quarter the positive year-over-year results that Five Star seen during 2015 continued. We were able to push rates, we were able to hold the line in occupancy and we kept a good control on our operating expenses. We also continue to push forth the programming and innovation that has led to higher resident satisfaction with our level of service and will lead to higher levels of resident and professional referrals, which in the long-term will lead to higher occupancy. We are confident that higher occupancy levels coupled with our expansion efforts and our acquisition program will lead to enhanced shareholder returns. Before I turn the call over to Scott, I want to thank Paul Hoagland, our former CFO for his years of service to Five Star. I’m also glad that Rick Doyle, our current CFO back at Five Star. Rick and I worked years ago at Five Star and it’s great to have him back. With that, I would now like to turn the call over to Scott.

[Scott Herzig:]

Thank you, Bruce. I will start up with a review of rates before turning to occupancy. Overall senior living average monthly rates increased year-over-year in the fourth quarter and looking at each portfolio our private pay independent and assisted living provided the greatest contribution to rate growth as fourth quarter average monthly rates increased at our owned senior living communities by 2.2% and increased 2.4% at our leased senior living communities. Our CCRCs experienced modest rate growth of 0.9% and skilled nursing rates increased by 1.5%. The muted rate growth in the CCRCs was negatively impacted by a couple of significant refurbishment projects that were ongoing during the quarter. As we have said in the past we will continue to target 2% to 3% private pay rate increases in 2016. Now turning to our fourth quarter occupancy results. I’ll provide a comparison for each portfolio. Year-over-year for the fourth quarter of 2015, total senior living occupancy declined 120 basis points to 85.0%, although total occupancy was flat with the third quarter. Occupancy at our owned independent and assisted living communities declined 280 basis points to 85.9%. Occupancy at our owned communities was negatively impacted in the quarter by capital projects at five of our communities that will convert existing independent living units to assisted living units. These conversion projects will most likely continue through the end of the second quarter. Independent and assisted living occupancy at our leased communities decreased 110 basis points on a year-over-year basis to 88.2%, but actually improved sequentially over the third quarter by 40 basis points. Total CCRC occupancy declined 70 basis points to 82.9%, but was up 10 basis points sequentially from the third quarter. Our managed occupancy decreased by 90 basis points to 87.5%, which was flat for the third quarter. And finally, occupancy at our skilled nursing facilities was 78.5% which is 80 basic points lower than last year and down slightly from last quarter. Total occupancy today is 84.1%, which is reflective of the slowness in move-in activity, which we saw starting in January of this year. As Bruce said earlier growing occupancy continues to be a major focus for us here at Five Star. In the fourth quarter, we continued the trend of positive move-in activity that we saw for the year 2015 highlighted by our continued focus on driving people to our own Five Star website and significantly reducing our reliance on third-party referrals for move-ins, which have the highest cost of sale and the shortest length of stay. Total move-ins for our same-store communities were up nearly 4% over the prior year and we saw marked increases in move-ins coming from our resident referrals and from our own Five Star website. Our commitment to improving our digital presence and capitalizing on happy satisfied residents continues to bear fruit and we will continue to make the necessary investments in digital ad campaigns, social media and ongoing website enhancements throughout 2016. Although move-in activity remains steady in the fourth quarter, attrition rates out-paced our move-ins. Deaths and discharges to higher level of care continue to be the overwhelming reason for move-outs, but we believe our added focus on new clinical programs to help aid in the early identification of changes to our residents health conditions could help mitigate the number of move-outs due to a need for a higher level of care and improve our overall length of stay over time. As many in the senior living space have been reporting, Five Star also has been impacted by the uptick in new supply in some of our markets. Many of our communities are experiencing new competition in their market areas and we expect to continue to experience some impact of this increase in new construction throughout 2016. That said we have been extremely proactive in these areas by making the necessary capital investments to not only ensure we maintain our ability to compete, but also showcase what makes our communities different and better than any new competition that opens their doors. For example, we’ll continue to showcase our clinical excellence that produced 19 American Healthcare Association Quality Awards in 2015, and other programs like our award-winning celebrity chef dining program, and our renowned resident engagement program Lifestyle360. These programs highlight just a few of the many advantages of living at a Five Star community as opposed to staying at home or with a competitor and we will continue to be aggressive in our approach to get our message out. In summary, while the environment for occupancy growth may continue to be a challenge throughout 2016. We remain encouraged with our ability to compete and move the needle forward over the long-term. I will now turn the call over to Rick.

[Richard Doyle:]

Thank you, Scott and thank you for joining us today. For the fourth quarter 2015 our senior living revenues grew to $281 million, an increase of $6.5 million compared to the fourth quarter of 2014, primarily due to private rate increases of 2.3% at our IL and AL communities. Total senior living management fees revenues were $2.8 million for the fourth quarter, an increase of 13% compared to the same period last year. Largely due to the increase in the number of communities we managed since January 2015. Management fee revenue for the full-year of 2015 was $10.7 million, an increase of 10% compared to the full-year of 2014. Senior living wages and benefits for the quarter were $134 million or 47.8% of senior living revenues, an increase of 10 basis points compared to the fourth quarter of 2014 and a 50 basis point sequential decrease to the third quarter 2015. At 47.8% of revenues senior living wages and benefits were in line with our expectations that remain well controlled. Other senior living expenses for the fourth quarter were $77 million or 27.5% of senior living revenues. This represents a 90 basis points decrease from 2014. Other senior living expense includes approximately $4.2 million litigation settlement Bruce previously discussed. In addition, we have seen a reduction in 20 basis points in food costs to 4.3% of revenues, another 20 basis points reduction in supplies to 3.4% of revenues and 40 basis points reduction in utilities to 3.6% of revenues. This all compared to the same period of 2014. General and administrative expenses were $18 million for the quarter and adjusted for non-recurring expenses were 4.6% of total revenues under management. This compares favorably to the prior year by 10 basis points. Rent expense for the quarter was $50 million or 17.8% of senior living revenues, a decrease of 20 basis points for the same period last year. Interest expense for the fourth quarter was $1.3 million and depreciation and amortization was $9.2 million. As Bruce mentioned earlier, we reported a loss from continuing operations $0.13 per share. However, when you add back to one-time non-recurring adjustments or $4.2 million of litigation settlements and the termination benefits of our former CFO of approximately $868,000, our loss from continuing operations would have been $0.03 per share. Adjusted EBITDA excluding non-recurring items was $9.3 million for the quarter, a 1.5% increase over the fourth quarter of 2014. The increase was primarily due to private pay rate increases and strong expense controls. The full-year adjusted EBITDA for 2015 was over $35 million, an increase of 30% compared to 2014. Adjusted EBITDA excluding non-recurring items was $59.4 million for the quarter, a $600,000 increase over the fourth quarter of 2014, a $234.4 million for the full-year of 2015 compared to $224.6 million for 2014, approximately $10 million increase year-over-year. Now I will review our liquidity cash flows and selected balance sheet items. Cash flow from operating activities was $4.8 million for the fourth quarter 2015. We invested $16.6 million of capital into our communities and sold $4.5 million of long-term capital improvements. In November, we acquired two private pay independent living communities for $26.2 million and funded this acquisition with $9.2 million of cash and by assuming $17 million of mortgage debt with an interest rate of 5.8% through 2022. At year-end, we had $14.7 million of cash and cash equivalents and $50 million outstanding on our credit facility. In February, we notified the lenders under our $150 million credit facility to exercise at our option to extend the maturity date by one-year to April 2017. Subject to the payment of an extension fee in meeting certain other conditions for lenders under our credit facility have agreed to extend the maturity date one-year to April 13, 2017. We have also decided not to extend or replace our $25 million revolving secured line of credit that matures in March 2016. At year-end, we had $384 million of net property and equipment, which includes 33 properties directly owned by Five Star, 13 of which are unencumbered by debt. At year-end we also had $50 million outstanding on our credit facility and $60 million of long-term mortgage notes payable. We had a small increase in both our borrowings and mortgages during 2015 as we acquired two communities and made capital improvements at our own properties. Today, we currently have $50 million outstanding on our $150 million credit facility. At the end of the quarter, our leverage was 38% of total book capital and 21% of debt to total assets. We believe that we are 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:]

Thank you. [Operator Instructions] And our first question will come from Brian Tanquilut of Jefferies.

[Jason Plagman:]

Hey guys, it’s Jason Plagman on for Brian. Just one quick clarification, did you say, you referenced 84.1% for occupancy was that as of Q1 I just didn’t catch what that was – what the timeframe was there?

[Bruce Mackey:]

No that’s just as of – it as last night actually, so just one-day in the quarter just to reference point.

[Jason Plagman:]

Okay. So that’s current occupancy has declined in January and February it sounds like?

[Bruce Mackey:]

Correct. Yes, in which seasonally does happen in the industry so and we’ve reached that kind of little bit…

[Jason Plagman:]

Yes. Okay and given the challenging occupancy environment you guys discussed, what’s your outlook for margins in 2016, are you going to be able to hold margins or expecting some pressure?

[Bruce Mackey:]

It all depends on what happens with occupancy I mean if the occupancy level – at this level to some extent throughout the remaining of the quarter, we will probably see a little bit of compression and be tough there to get otherwise. We do make cuts when there are dips in occupancy, so we are doing that, but it’s probably tough to make all of it, but we are working very hard to get that occupancy back up and we usually see gains as the year goes on, so we expect it to come back.

[Jason Plagman:]

Okay. And then it sounds like the pipelines for CapEx projects, its quite a few things there. How should we be thinking about the total spend in 2016? And then if you could just comment on early reads on the ROI from some of the Rehab to Home projects, how the returns have been so far in those early projects?

[Bruce Mackey:]

Sure. I think - if you look at what we did for CapEx last year it’s going to be in that same range plus these projects coming online, so you probably that mean the larger ones that I talked about are really going to be end of the year, so I don't see a significant amount of money going into them. But the 70 units that coming online so maybe that 10 – I mean ballpark is $5 million to $10 million more this year then last year and then it will probably kick up again in 2017. We completed I think three Rehab to Home projects at both of them off-the-cuff we have seen decent increases in our Medicaid A populations and what we’ve been driving for and margins are up for three projects significantly it’s – again I can't speak to it just off-the-cuff right now, but we have seen good returns on them.

[Jason Plagman:]

Okay. And then on the discussion about the use of – relying more on internally generated leads and things like that. How do you weigh the potential impact on occupancy versus the cost of external marketing spend - just any metrics you can provide there on cost for lead or anything would be helpful?

[Bruce Mackey:]

Well, our best leads are going to be from our resident referrals those are definitely the cheapest ones, those were up 7% year-over-year, our professional leads are other great sources of leads that are relatively inexpensive, those were up 6% year-over-year and we are driving people to our website, we are making the investments online to really get people to our own website and really our reliance on places like a place for mom and carrying like that we are trying to drive that down, because as we said those are expensive leads to take, they are hard to cultivate and they stay a lot shorter than we want them to. We are doing paperclip campaigns online, but really taking a lot of that spend that we did with the third-party referral sources and using that – a part of that to driving people to our own website. It's kind of a loss on spend so we’ll continue to make the investments that we need to drive people there to our website, but that's the goal to get people to our own website.

[Jason Plagman:]

Great. And one higher level of question, the topics that have come up with the letters to the Board and that discussions. What measures of management or the Board discuss to demonstrate alignment with shareholder interest I mean is there anything that are being considered for governance or disclosure to help improve and show that commitment to shareholder, create aligning with shareholder interest?

[Bruce Mackey:]

Our Board regularly reviews governance. They just issued new governance guidelines yesterday. We do make changes and look at that stuff all the time. I know myself, I own about 1.5% of the Company. So I think our interests are aligned with the shareholders, we want to see the stock up, we are not happy with where it is right now and again our focus on improving operations and earnings. I think combined with what I’ve talked about in the call in terms of expansions and our acquisition program. I think really helped drive us there over time. And is it going to turnaround in the next quarter? Likely not, but I think long-term this is a great Company, this is a great industry and we feel that we are really well poised to take advantage of it in the future.

[Jason Plagman:]

Okay. Thanks. I’ll hop off.

[Bruce Mackey:]

Great. Thank you, Jason. End of Q&A

[Operator:]

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

[Bruce Mackey:]

Great. Well I want to thank everyone for joining us on our fourth quarter earnings call and we look forward to updating you on our future progress. Thank you.

[Operator:]

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