Five Star Quality Care CEO discusses Q4 2012 Results - Earnings Call Transcript

Five Star Quality Care (FVE) Q4 2012 Earnings Call February 15, 2013 10:00 AM ET

Executives

Tim Bonang - VP, IR
Bruce Mackey - President and CEO
Scott Herzig - COO
Paul Hoagland - CFO

Analysts

Seth Cohn - Stifel Nicolaus
Dana Vartabedian - Deutsche Bank
Mike Petusky - Noble Financial
James Gibson - Punch

Operator

Ladies and gentlemen, good day and welcome to the Five Star Quality Care fourth quarter 2012 financial results conference call. At this time all lines are in a listen only mode. There will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the call over to our host, Vice President, Investor Relations, Mr. Tim Bonang. Please go ahead.

Tim Bonang

Thank you and good morning everyone. Joining me on today’s call are Bruce Mackey, Five Star’s President and CEO; Paul Hoagland, Five Star’s CFO; and Scott Herzig, Five Star's COO.

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 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, February 15, 2013.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission regarding this reporting period.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now I would like to turn the call over to Bruce Mackey.

Bruce Mackey

Great. Thank you Tim, and thank you all for joining us on our 2012 fourth quarter earnings call. The fourth quarter of 2012 marked Five Star's 16^th consecutive quarter of profitability with mid-income continuing operations of $0.07 per share. These results are up significantly from the $0.02 per share we reported in the fourth quarter of 2011. EBITDA adjusted for non-recurring items at $12 million was up an impressive 39% from last year.

For the full year 2012, Five Star generated net income from continuing operations of $0.24 per share, total revenues of $1.4 billion and EBITDA of $46.2 million. At year end, 75% of our senior living revenues came from our resident's private resources and 92% of our total company revenues came from senior living.

During the fourth quarter, we were focused on completing some substantial acquisition activity. To remind you, back in May, we reached an agreement with Sunrise senior living, whereby they agreed to terminate leases for 10 senior living communities that they leased from senior housing properties trust so that Five Star could take over as manager.

In total, there are 10 communities with 2500 units located in six days. We began to manage three communities in September and during the fourth quarter, we began to managing the remaining seven communities with 2065 units. Separately in December, we began to manage two additional ceiling communities located in Tennessee and Texas with a total of 168 units.

Back in October, we entered in an agreement to sell two skilled nursing facilities located in Michigan with 271 units. These facilities are included in our discontinued operations. We are working hard to finalize the sale and expect that may close during the first half of 2013.

Recapping on growth in 2012, we took on the management of 15 senior living communities with a total of 3300 units across 11 states. The management business has been a big contributor to our overall growth this year. We now manage 39 senior living communities with 6700 units that generated $5.08 million in management fee revenues during 2012.

The benefit of managing communities of Five Star is three fold. We've invested no capital in this business, we expect to generate annual management fee revenue of approximately $9 million from the community's under management at year end and the majority of this revenue falls through our bottom line.

Now looking at the results of our senior living business which includes independences as to living, continuing care retirement communities and skilled nursing facilities. We reported $279 million of revenue and $73.8 million of for the fourth quarter of 2012. Revenues were up 1.6% from last year and EBITDARM was up 4.2% from last year.

For the full year, our senior living business produced $1.1 billion of revenue, up 3% from last year and $293 million of EBITDARM, up 3.7% from last year.

Moving on to our managed communities, occupancy for the fourth quarter was 87.5% up 2.1% from last year. Quarterly management fee revenues have grown to $2.2 million. On a same store basis we grew managed community occupancy by over 400 basis points from last year.

The rehabilitation hospitals which account for 8% of total revenues generated $2.7 million of EBITDARM during the quarter which is up 8% from last year. On a full year basis, EBITDARM was up 5.4%. Revenues for the quarter were $27.5 million, up 1.7% from last year and revenue on a full year basis were $107 million.

Occupancy for the quarter was 60.2% down from 61.4% last year. During the quarter, we completed renovation work at our traumatic brain injury unity in our Braintree Hospital which is currently performing to our expectations. We are also remodeling an additional wing at both hospitals and are still on track to open a transitional care unit at our (inaudible) Hospital by the end of 2013.

In summary, 2012 marked a year of impressive performance for our company demonstrated by the significant quarterly, and annual increases in EBITDA. EBITDA for the quarter was up 39% compared to last year and full year EBITDA in 2012 was up 14% compared to 2011. In addition, our financial growth, the company's stock price total return during 2012 was 67% significantly beating the broad market indices. Our year-to-date total return as of yesterday was just over 25%, certainly a nice bump compared to our peer group and an indication we think that investors are starting to see the real value in Five Star.

Although we think these are exciting numbers, our $300 million market cap still does not reflect the tremendous value we have in just our own portfolio of properties which have a net book value of $350 million significantly above our market cap and far below just their market value. We believe that by continuing to be diligent in our approach to managing the balance sheet, by focusing on growing our private pace senior living business, by continuing to provide high class service to our residents, and by reinvesting in our communities, our valuation will be more in line with the true value of our company.

Our plans for 2013 remains consistent with last year. Occupancy growth is still one of our highest priorities. Our occupancy is well below our historical high of over 90%. We did see some impressive growth in independent and assisted living occupancy over the last two quarters which was up 40 and 50 basis points respectively being in the NIC MAP results but we have more to do.

We have talked about the strong flow through from occupancy where a 1% increase was $10 million in revenue, the majority of which will fall through our bottom line. Increasing rate is another priority and a very powerful agent of revenue growth. Average monthly rate for the quarter was 2.5% compared to last year and we still expect to grow our private pay rates between 2 and 3% on an annual basis.

And finally, growth through acquisitions remains central to growing our bottom line. We have discussed the ways in which we can grow, through managing communities, acquiring communities on our balance sheet or by leasing communities. We have ample capacity to acquire communities in our own balance sheet and continue to look for opportunities to do so understanding that it makes us a stronger company in many respects.

At this point, I turn the call over to Scott Herzig, our Chief Operating Officer to provide more detail on our operating results. Scott?

Scott Herzig

Thank you Bruce. Senior living occupancy was 85.7% for the fourth quarter which was flat with last quarter and down 50% from last year. however, occupancy in our independent and assisted living communities continue to perform well at 88.5% which was up 50% from last quarter and up 20% basis points from last year. if you look at our occupancy results compared to the NIC MAP 31 quarterly industry data set provided by the national investment center for seniors housing and care, their report indicates that during the quarter, independent living was up 10 basis points, assisted living was up 20 basis points and skilled nursing was down 10 basis points.

Our independent assisted living occupancy results which were up 50 basis points from last quarter were significantly ahead of the industry set. If you remember back to the third quarter, we reported a 40 basis point sequential increase in independent and assisted living occupancy which also beat industry results.

NIC MAP is predicting occupancy to increase in the top 31 metro markets by 60 basis points during 2013. Our results in independent assisted living over the last two quarters show great growth and we expect that with continued improvement in the economy and the housing market, coupled with our focus on sales and marketing to increase referrals, inquiries, tours, deposits and move-in, we should be more in line with the industry set during 2013.

As of yesterday, total senior living occupancy was 85.5%. Typically the first quarter presents some seasonality challenges with regards to occupancy and that has been the case so far in the first quarter of 2013. As many of you may be aware, the current flu season has been more severe this year than in the year past. Given this, we are not surprised to see our current occupancy numbers temporarily dip.

To help improve our occupancy in the skilled nursing units, we'll be looking to expand our Five Star rehab to home product in several of our CCRC. We are essentially upgrading older nursing units within select CCRCs in to state of the art, short term rehabilitation centers. These units will be private patient rooms with upgraded bathroom, flat screen television, high quality in-room dining services and upgraded private rehab areas.

We have found that these upgrades not only produce positive outcomes for those we service, but healthy returns for the company. The goal is to position Five Star as provider of choice in our selected market areas.

Looking at rates, during the quarter, our senior living average monthly rate was up 1.2% from last quarter and up 2.5% from last year, primarily driven by increases in private pay rates. Average monthly rates at our private independent assisted living communities was up 2% year-over-year and we're expecting to grow rates by 2 to 3% on an annual basis in 2013.

A new initiative that I am focused on with Five Star is brand improvement. Our size and continued growth lends itself to us looking more closely at our brand on both a local and national level. We are one of the largest operators in the country and because the senior housing market is so fragmented with so few large operators, we think there is a big opportunity to try to impress the Five Star brand throughout the country into each of our local communities.

Local and regional ties are really the ultimate driver of this business where all the benefits can benefit from doing things that work well across our network. Brand equals efficiency and although Five Star has always been an efficient operator from a cost control perspective, we have significant buying power and leverage as well as knowledge, expertise and technology that we can bring to all of our communities.

In summary, 2013 looks to be another exciting year for Five Star and I can assure you that each and every team member will continue to provide the best possible care and services to our 26,000 residents each and every day.

With that, I will turn the call over to Paul Hoagland.

Paul Hoagland

Thank you Scott and good morning everyone. Thank you for joining us today. I will review our year-over-year quarterly financial results for the fourth quarter and for the year ended 2012. Senior living revenues for the quarter were $279.2 million up 1.6%. For the full year, senior living revenue were $1.1 billion, an increase of 3%. The increases are primarily due to increase per DM charges to residence and the full year operation of communities will begin to lease during 2011.

Management fee revenues from the 39 senior living communities we manage were $2.2 million for the quarter and $5.8 million for the year. These 39 communities are expected to generate approximately $9 million of annual management fee revenues and our expectation for 2013.

Senior living wages and benefits for the quarter were $135.4 million down 1.5% and for the full year, we're $548.2 million, an increase of 2.2%. Total senior living wages and benefits during the quarter were 48.5% of senior living revenues which is 150 basis point reduction from last year. As we have been able to make and hold onto improvements in labor expenses and also enjoy reductions in health insurance, as well as workers compensation cost in areas that we have been focusing on.

Other senior living operating expenses for the quarter were $70 million up 5.2% from last year and for the full year were $270.1 mli, an increase of 4%. As a percentage of senior living revenues, other operating expenses during the quarter were 25.1%, up 90 basis points from last year due to increased charges from various service providers as well as increases in food, property taxes and supplies. However, these expenses were partially offset by reductions in utilities, and insurances.

Moving on to other income statement items. General and administrative expenses during the quarter were $16.2 million, up 5.6% from last year and represents 4.5% of total GAAP revenues. If you include the revenues from the 39 communities we managed, G&A was actually 43% of total revenues. G&A for the year was $61.6 million, an increase of 7.1% which represents 4.6% of GAAP revenues and 4.4% of total revenues including managed community revenues.

Rent expense for the quarter was $50.6 million up 1.3% from last year, but flat as a percentage of senior living and hospital revenues. For the full year, rent expense was $201.6 million and equal to the prior year's percentage of revenues. Income tax expense for the quarter was $807,000 and for the full year was $5.6 million. We have trued up our year-to-date tax provision which was favorably impacted by real employment base tax credits.

Interest expense for the quarter was $1.5 million and depreciation and amortization was $6.4 million.

Now I'll review our liquidity, cash flow and selected balance sheet items. Operating cash flows were $13.5 million for the quarter and $56.8 million for the year. During the quarter, we invested $17.1 million of capital into our community and sold $12.3 million of long term capital improvements. For the year, 2012 we invested $57.4 million of capital into our community and sold $30.5 million of long term capital improvement resulting in a net capital spend of $26.9 million. At December 31, 2012, we had cash and cash equivalents of $24.6 million. EBITDA excluding non-recurring items was $12.1 million a 39% increase compared to last year and EBITDA for the full year was $46.2 million, up 14% from 2011. In reviewing our balance sheet, our accounts receivable management remains well controlled and as of December 31, 2012, the number of days sales outstanding for our consolidated operations was 17.1 days.

At quarter end, we had $335.6 million of net property and equipment which includes 31 properties directly owned by Five Star, 12 of which are encumbered by debt. We had $24.9 million of convertible senior notes and $46.3 million of mortgage loans payable which includes $7.5 million included in discontinued operations. Our two revolving credit facilities are currently undrawn and have a capacity of $185 million. At the end of the quarter, our leverage was 195 of book value and 12% of assets. We believe we are in compliance with all material terms of our credit note and mortgage agreements.

In closing, 2012 was a successful year of many achievements for Five Star. We overcame the 11% Medicare rate (inaudible) during the fourth quarter of 2011 which adversely impacted our annual [zest] by approximately $17 million. We collateralized 15 of our 31 owned properties and established a $150 million acquisition line of credit which was untapped at year end.

We divested our pharmacy business in September and created approximately $38 million of liquidity and increased our focus on our private pay, independent and assisted living business.

And lastly, we took on the management of 16 primarily private pay, independent, and assisted living communities during the year. Our focus remains clear in 2013. We will continue to provide the highest levels of care and resident satisfaction and as we do, this will enable Five Star to increase occupancy, increase private pay rate, continue to manage costs and improve margins, acquire private pay, independent and assisted living communities either on our balance sheet or by managing our leasing and most importantly, to continue to increase shareholder value.

With that Bruce, Scott and I would like to open it up to questions. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions). First question today comes from the line of Dan Bernstein representing Stifel Nicolaus. Please go ahead.

Seth Cohn - Stifel Nicolaus

Hello this is Seth Cohn filling in for Dan. I was just curious about the MPTR changes, (inaudible) business, basically stick about it and the impact I see in revenue.

Scott Herzig

We're not seeing as big a threat from the MPTR reductions and changes there. It's not a big issue, we don’t think for us currently. We have more concern with the, it was a partly caps, really than with the MPTR.

Bruce Mackey

And those partly caps did impact us in the fourth quarter to the tune of 200,000ish somewhere in the range though. We've lost that with a level from our senior living business.

Seth Cohn - Stifel Nicolaus

And also I was just wondering if we back into the average daily rate for sniffs it went up pretty nicely in the fourth quarter versus the third quarter, coming out was about $220 per day. Is there anything in with the case mix, we imagine the case mix improve and what's your, if you see that as a continuing trend of improvement or…?

Bruce Mackey

It's tough to say whether it’s a continuing trend. Obviously the case mix is a little bit better if we had more Medicare patients in the fourth quarter, in the middle of third quarter and so far in the first quarter, that trend has continued so far.

Seth Cohn - Stifel Nicolaus

And just lastly, I was just wondering if you want to put some numbers behind 2013 guidance in terms of acquisition volume, if you guys see acquisitions being a repeat of 2012 or increase on balance sheet.

Bruce Mackey

Pegging guidance for acquisition is tough. We've got capacity on our balance sheet do a fair amount. We've also got our finance partner that we can lease properties from while manage on their behalf and they can do a fair amount. We have a big appetite, we look at a lot of stuff. We are seeing some stuff but the volume probably isn't there right now or wasn't in 2012, but that can change fairly quickly. Sometimes I think it was going to be a slow year and it turns out we take on 20, 25 communities. So as of right now, I don’t expect anything closing for us in the first quarter, I think that’s pretty safe to say, but hopefully that will change.

Operator

Our next question comes from the line of Darren Lehrich with Deutsche Bank. Please go ahead.

Dana Vartabedian - Deutsche Bank

This is Dana Vartabedian in for Dan. Just a few questions here, first, on the base business, I guess particularly with respect to the ILAL segment, I was wondering if you could give us some more color for how you're thinking about rate and occupancy heading into 2013. And then aside from flu, have you seen anything in your markets maybe in terms of new capacity growth or anything that could impact occupancy?

Bruce Mackey

In the prepared remarks we did say that the NIC MAP is predicting a 60 basis point increase in ILAL occupancy. We think that is fairly reasonable. I'd like to do a little bit better than that in all honesty, in terms of what we're shooting for as a goal. Rates we should target 2% to 3% rate growth on our in-house residence and I don’t think that’s going to be that hard to achieve on that side either. So that’s really the two targets on that front.

We are seeing a little bit, it's still extremely limited. The NIC MAP data for the fourth quarter shows Star was still at a very, very low rate, regionally we are having some talk about smaller operated Star and we think about getting in development. There is not a lot of capital out there for development right now, so people have to really put up a lot more equity in the years ago and that hasn’t change. So I think it's going to be a good thing for us a little bit in terms of carrying off having new development mean weighed down by capital needs.

Dana Vartabedian - Deutsche Bank

Given the upcoming potential (inaudible) cuts to the extent, do you have any headwinds from that, sort of how are you planning to mitigate or offset from those?

Bruce Mackey

Well we had some significant headwinds two years ago when they cut Medicare aid by 11% and we offset those. While we're not happy to see more rate decreases coming, I think it is probable that we'll see a 2% rate cut in America business effective on March 1^st. Medicare was a small part of our business, a big focus is Five Star. We came under the gate 10 years ago was to really drive ourselves in to that private pay business to today more than 75% of our senior living revenues come from private pay. So we will see a Medicare cut of 2%. But it's on a small part of our business now. Years ago, it would have been devastating but today, we're more than offset it was our private pay growth and I expect to offset some of this through acquisitions as well.

Dana Vartabedian - Deutsche Bank

On the sniff business, can you give us some more color for how you're thinking about that on a go forward basis, particularly with respect to occupancy and length of stay?

Bruce Mackey

Sure, occupancy as Scott talked about in his prepared remarks, it is a focus of ours riding off we can see in our sniff business, we've been a little down in that area. Some of that is a fact that we are in a more rural markets than a lot of our competition that’s just going to be what it is in all honesty. But another big part of that is, we do need to put some capital into our skilled nursing to predominately and our continuing into retirement communities. We've did some really big upside in that we had the home product that we look to emphasize. We've had some good success in trial areas, really in 2012, 2011,we got a few running and we've seen great things. Our skilled nursing, we do put that via the home product in. So up, command a waiting list and do well for us, do very well. So we'll see a lot more of those from us throughout the years coming.

Talking about the portfolio as a whole, it wouldn’t surprise me if we selectively continue to get out some of our standalone skilled nursing facilities that aren't performing well. So when we started Five Star, we had 56 communities of that 38 still today, of those 38 due, make good money for us. We got to rent deal when we're kicked out of the public company, so they're cash flow positive. But there are a few that we will take a look at and luckily dispose over the next couple of years, it wouldn’t surprise me if that portfolio is a little bit less down the road than it is today.

Operator

(Operator Instructions). And we will go to the line of Mike Petusky with Noble Financial. Please go ahead.

Mike Petusky - Noble Financial

Obviously you guys have been occupancy improvement in the ILAL outpacing industry here in the last quarter or two, but you're still lagging overall. Is it reasonable to think that you guys can close the gap all the way, say over the next two to three years or is there just some things inherent in your buildings which makes that tough?

Bruce Mackey

Well I think if you break apart our portfolio, you focus on ILAL. The gap there is pretty small, if not existent. I think we've outperformed the industry with the vast majority of our properties. We have be bogged down a little bit with skilled nursing and our CCRCs and with the CCRC fees, the really the issue has been skilled nursing. So that’s kind of the focus on growing that. And again as I mentioned in the last question, some of that is inherent in the portfolio. We are enrolling markets that gap like you said will be there to some extent, but we do think there is a lot of work that we can do to help close that gap over the next couple of years.

Mike Petusky - Noble Financial

And then a question around the brand improvement commentary. If there are two or three things that you all could essentially identify in how you are going to do that, what would be those be?

Bruce Mackey

Well I think initially, we've got a number of communities. For example, we've got a Morningside brand, we've got a Premier brand and a 40 unit build is going to have a much different brand and look than a 300 unit building, (inaudible) at that one recently. But we're going to start to move towards similar signage. We're going to start to come up with the design standards, so we do remodeling. Again, we're not giving our operators and area chief engineer design teams kind of a blank slate. We're going to have them go in with two or three designs for each type of building that they can chose from. Now it is going to be market driving, obviously designs in the southwest is going to be predominately different than designs in the northeast, but we do want them to have somewhat of a similar look and feel to start to kind of really crucify Star brand.

Mike Petusky - Noble Financial

And in terms of the cost, in terms of the upgrade to some of the skilled nursing buildings, can you guys quantify that in terms of the upgrades?

Bruce Mackey

Yes it's tough to say. We probably spend about a $1 million, for about a 15 bed unit at one of our communities in Arizona. So it's going to be in that range. And the thing about that, again, I know you know our CapEx structure that will be funded by the weak predominately, we'll pay rent on that, but any pickup from that all comes to Five Star. So the payback for us is pretty quick.

Mike Petusky - Noble Financial

All right and then last question just around your optimism or lack thereof of being able to get active on the M&A front and also if you would talk about just how you're thinking about these different ways to do M&A acquisition lease, managing etcetera. Can you just talk about possible priorities if you have them there. Thanks.

Bruce Mackey

Sure, I am pretty optimistic. I can just take a look at what we've done over the last several years. Five Star is one of the top largest senior living operators in the country right now and we've done that through acquisition growth. So I continue to see us be busy on the acquisition front, just because it's kind of a little slow right now, it doesn’t mean that’s going to be a long term thinking. People know if they want to sell something, they’ve got a pretty viable buyer here in Five Star and with our capital partner. In terms of priorities, I'd like to acquire more stuff from our own balance sheet. In all honesty I think it makes us a stronger company and we can do that with smaller deals that are one off that generally don’t command the cap rates that the larger portfolios do. But when we do with the larger portfolio like I said we've got that luxury of working with our capital partner and managing on their behalf and that’s a great deal for us as well. We've driven that management fee business with a $9 million today of revenue. That more than offset, didn’t fully offset but in that Medicaid rate cut, a lot of that came through growth predominately driven by our management business.

Operator

And next we'll go to the line of James Gibson with Punch. Please go ahead.

James Gibson - Punch

I noticed that the occupancy of the communities that you own was up pretty significantly since September and up about 3% for the year. What were the riving factors of that?

Bruce Mackey

Again, all those communities that we own are independent assisted living communities, and that’s where we've had the biggest amount of success in driving occupancy. (Inaudible) there is one or two properties there individually that we had good luck with. A lot of it was stuff that, some of it was a portfolio we bought in '08, '09, we're probably out of bench for personal then lift of that we just recently completed some CapEx projects on and we really had some good success there in the Caroline or so. That’s probably been the biggest driver of that is getting at those capital projects completed and behind us.

James Gibson - Punch

Are the demographics of the properties you own different than the ones that you lease that would kind of affect the different occupancy trends during the year?

Bruce Mackey

No, not really in all honesty. We own a lot of communities, we're in the Caroline, we are in Indiana, we've got one in Florida, one or two in Virginia, somewhere in that area and that’s in markets where we will release. Predominately, it's very similar. If you look at our characteristics that we owned and lease portfolio in total, we average about 110 units for our community and if you look right at our own stuff, we've got 31, obviously it’s a little bit less, you're talking about 95 units communities, so it's very similar stuff and the age is similar as well.

James Gibson - Punch

Do you break out what the EBITDA contribution was in 2012 from the communities you own?

Bruce Mackey

No, we don’t provide that information but obviously I think if you were to take a look at the blended averages of our independent and assisted living which have comprised of owned and lease, you can almost use those same ratios against the owned and although the owned are slightly, slightly lower in average monthly rate, but again, those percentages will pretty much hold true to the owned.

Operator

Speakers, I'll turn it back over to you for closing comments.

Bruce Mackey

Great, well thank you for all for joining us today. We look forward to updating you on our first quarter results and the results from the spring. Thank you. Bye.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and using the AT&T executive teleconference. You may now disconnect.