Five Star CEO Discusses Q4 2010 Results - Earnings Call Transcript

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Five Star Quality Care Inc. (NYSE:FVE) Q4 2010 Earnings Call February 22, 2011 5:00 PM ET


Tim Bonang – Vice President, Investor Relations,

Bruce Mackey – President and CEO

Paul Hoagland – Chief Financial Officer


Jerry Doctrow – Stifel Nicolaus


Good day. And welcome to the Five Star Quality Care Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session 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 conference over to our host, Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead.

Tim Bonang

Thank you, and good afternoon, everyone. Joining me on today’s call are Bruce Mackey, Five Star’s President and CEO; and Paul Hoagland, Five Star’s CFO. 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 prior written consent of Five Star.

Before we begin today’s call, 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 Federal Securities Laws.

These forward looking statements are based on Five Star’s present beliefs and expectations as of today, February 22, 2011. The company undertakes no obligation to revise or publicly release the result of any revisions of 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 to not place undo reliance upon any forward-looking statements.

And now, I’d like to turn the call over to Bruce Mackey.

Bruce Mackey

Great. Thanks, Tim. And thanks everyone for joining us this afternoon. Just after market closed, we reported net income from continuing operations of $0.18 per basic share and $0.17 per diluted share for the three months ended December 31, 2010. This compares with $0.02 per basic and diluted share that we reported for the same period a year ago.

However, income from continuing operations for the fourth quarter of 2010 and 2009 includes several items that in aggregate resulted in a positive impact of approximately $1 million and $412,000, respectively. Paul will review those one-time items in his prepared remarks.

So, excluding non-recurring items, fourth quarter 2010 income from continuing operation was $0.15 per basic and diluted share, which is a substantial increase from a fourth quarter of 2009 income from continuing operations of $0.01 per basic and dilutive shares.

While Five Star looks for occupancy to improve we do so from a position of strength and solid profitability, which is unique to the industry. Of the four largest publicly traded senior living operated in the United States based on unit, Five Star alone has achieved profitable in each and every one over the past eight quarters.

Looking at things under the way, our income from continuing operations for the year was $0.63 per diluted share, excluding all one-time items. I would note that we recognize the importance of delivering consistent financial results to our shareholders. Over the past four quarters, we’ve established a consistent trend and we aim to continue on its path in 2011.

We think this best-in-class operating performance in a challenging marketing environment underscores Five Star’s value, differentiate us from our peers and shows that Five Star is solidly positioned to benefit from occupancy increases in the future.

I would now like to give some highlights from the quarter. Senior living occupancy for the fourth quarter of 2010 was 85.9%, compared to 86.2% a quarter ago and 86.2% a year ago. Same-store occupancy for the fourth quarter 2010 was 85.8%, compared with 86.2% a year ago. Occupancy as of this past Friday was at 85.7%.

The biggest occupancy challenge during the fourth quarter came from our skilled nursing business. This drop was somewhat in line with the fourth quarter of NIC MAP data that was released a few weeks ago and it consistent what we see in years past. People typically don’t have elective surgeries around the year-end holidays and that seem the case for us this year.

After year end, we saw our skilled nursing business pick up, but as an offset by a slight decrease in our private pay business. We noted a slowdown in our [inquiry and deposit] after Thanksgiving and are moving to now keep pace with our move-outs in January. I’m pleased to report that this trend is going to reversed in February.

Same-store inquiries in the fourth quarter of 2010 increased about 12% over the fourth quarter 2009, but were down about 20% from last quarter. Same-store deposits were up in the fourth quarter of 2010, approximately 18%, compared to the fourth quarter of 2009, but again were down about 18% when compared to deposits in the third quarter of 2010.

Given the seasonality of our business, a decrease in these activities between the third and fourth quarter isn’t uncommon. Some good news here is that our inquiry and deposit activity picked up in January 2011. We had 467 more inquiries in January compared to our monthly average of 3,550 in the fourth quarter of 2010. We also saw an increase in deposits as well. In January we took on 290 deposits which compares favorably to our monthly average of 265 deposits in the fourth quarter of 2010.

We are doing a good job of pushing rate where possible. Our senior living average daily rate increased 4% during the quarter, more importantly 4.6% on a same-store basis. Looking forward, we still expect our private pay rates to increase 3% to 4% in 2011.

Moving on to other metrics, wage and benefits as a percent of sales and revenues were 50.4% during the quarter, down from 51.4% a year ago. G&A as a percentage of revenues was consistent with last year at 4.6%. We still maintain the leanest operations in the industry. Our stated goal is to keep this figure around 4.5% of revenues.

Our core senior living business continues to be profitable, just over 85% of our total company revenues come from this business. 70% of our senior living revenues are derived from residents private pay sources. In the fourth quarter of 2010, Five Star senior living produced $25.4 million of EBITDAM, compared to $23.7 million of EBITDAM last quarter. More significantly, Five Star senior living produced 39% more EBITDAM in the fourth quarter of 2010, compared to $18.4 million produced in the fourth quarter of 2009.

The relocation hospitals which account for 8% of total revenues lost about $421,000 of EBITDAM during the fourth quarter, compared with a loss of $364,000 last quarter. In August, we had a state hearing for relocating one of our inpatient satellite units to a branded facility that is under construction. This was approved by the state in the fourth quarter of 2010 and we expect to move to our new location by the end of 2011.

We also completed work on our traumatic brain unit at our Woburn hospital. We now operate perhaps the finest and most advanced traumatic brain injury unit in the country. Our unit opened to patients in mid-January and we have been very pleased with the results so far.

We are still continuing our efforts to move excess license capacity at our hospitals to third-party host hospitals, but as of now, we have nothing significant to report on. The pharmacy operations which make up 6% of our total revenues made $186,000 on an EBITDAM basis during the fourth quarter. This was about a $160,000 improvement over the fourth quarter of 2009 with a drop of $377,000 from last quarter, which is primarily due to a drop in skilled nursing occupancy, not only at Five Star communities but at our third-party communities as well.

In addition, we did lose some contracts during the fourth quarter of 2010. At year end, we’d approximately 12,100 customers and expect to add over 1,000 additional customers during the next several quarters.

Our balance sheet remains strong. We ended the quarter with approximately $20.8 million in cash and had in excess of $200 million of book value, not fair market value in net property and equipment. This includes 26 of the properties we own, 24 of which are unencumbered with debt. Also at quarter end, our $35 million revolving credit facility was untapped and remains so today.

During the fourth quarter, we repurchased $3.2 million of our conversable senior notes at 5% discount to par. We have $37.9 million of convertible senior notes currently left that can be put to us in October 2013.

I’d also like to highlight that on February 4th, Five Star began training on the New York Stock Exchange after moving from New York Stock Exchange, Amex. In addition to the higher level of financial standards holistic company, we believe this move to the big board makes Five Star more appealing to wider investors and may provide all investors with more liquidity. The third quarter was another excellent operating quarter for Five Star.

We remain well-positioned to take advantage of the gradual rise in occupancy that is anticipated for our industry. Our keys to success remain the same, increase occupancy and average daily rate, while holding labor, operating expenses and G&A costs in check. Throughout the past year we have performed consistently on the last four. We are stronger today compared to any point in our company’s history.

We do realize that’s Five Star largest opportunity to significantly enhance shareholder value is to increase occupancy. Every percentage point increase in occupancy will increase our revenues by an additional $10 million. The majority of these additional revenues will flow to our bottom line. As the economy continues to improve, so will our occupancy.

The several years prior to recession our occupancy was above 90% and expect us to get back to those levels once again. However, I feel we need to increase our efforts and resources in 2011. To address this we are taking the following important steps.

We are excited to report that we are bringing on a new Vice President of Sales and Marketing. This person has close to 20 years of experience in Sales and Marketing and over the last several years was in a very senior position at a large national senior living company.

This is a newly created position at Five Star. Previously our Sales and Marketing efforts were overseen by our director of Business Development who will continue in her role and will report to the new Vice President of Sales and Marketing. We are expanding the number of our regional directors of Sales and Marketing by about 25%. We expect to have these positions filled in the next few months.

This will allow our regional personnel to spend more time at a fewer number of communities. Neither these additional personnel or the addition of our new Vice President of Sales and Marketing should impact our overall general administrative costs, as we’ve been able to identify efficiencies that will offset the costs associated with these new hires.

Over the past three years Five Star spent just under $200 million in improvement to make sure our buildings are in top difficult condition. We plan to spend another $55 million in 2011. We believe that with our communities in top shape and our renewed focus on our sales and marketing efforts, we are significantly poised for a significant upturn in our occupancy in the future.

At this point, I will turn the call over to Paul Hoagland, our Chief Financial Officer.

Paul Hoagland

Thank you, Bruce, and good afternoon, everyone. For the fourth quarter our senior living revenues increase $15.1 million or 5.9% to $270 million, as compared to the fourth quarter of 2009. This increase was due primarily to revenues of $8 million from the 11 communities we began to operate during the fourth quarter of 2009 and the one community we acquired during the third quarter of 2010, plus increased per diem charges to residents of 4%, offset by a decrease in occupancy, which decreased from 86.2% to 85.9%.

The 4.6% increase in per diem charges to residents at our communities that we have operated continuously since October 1, 2009, generated approximately $11.6 million of revenues at our comparable communities. Also during the fourth quarter of 2010, we had a small benefit of approximately $4.1 million or 1.5% of our total senior living revenues as a result of the implementation of RUG-IV in October of 2010.

Senior living wages and benefits expense increase $5.1 million or 3.9% to $136.2 million, compared with last year. $4.1 million of this increase was due to our new community. However, senior living wages and benefit costs for our comparable communities decreased 100 basis points as a percentage of revenue from 61.4% to 50.4%, primarily due to improved labor controls and slightly favorable benefit costs.

Other senior living operating expenses increased by $939,000 or 1.5% to last year. This was due to a $1.2 million increase from our new communities, offset by $237,000 decrease at our comparable communities. As a percentage of revenues, senior living operating expenses decrease 100 basis points from 24.5% to 23.5%. We have less expense in our operating supplies, services and food, as we are increasing our focus in these areas.

In addition, we enjoyed a reduction in utility expense as well and as previously mentioned, we continue to take steps to reduce our utility expense. The seasonality of our business sees utility costs at their highest levels during the first and third quarters. During the fourth quarter of 2010, our utility expense followed the same pattern, decreasing by $1.6 million from last quarter, solely due to usage.

Most notably utility expense as percentage of revenues dropped 70 basis points in the fourth quarter of 2010, compared to the third quarter of 2010, which was a more significant decline than the 50 basis point drop we saw from the third quarter of 2009 to the fourth quarter of 2009.

As you recall, in 2010, we entered into an outsourced processing arrangement with a third party that will pay, analyze and purchase energy for our company. This initiative will become operational as we start the New Year. And in addition, we made a capital investment of just under $3 million in a lighting retrofit program that was completed at the end of 2010.

As we stated before, we expect to see a reduction of our consumption of utilities and resulting expense in 2011, as a result of these initiatives. As Bruce noted, our income from continuing operations was influenced by nonrecurring items in both the fourth quarter of 2010 and 2009.

Income from continuing operations for the fourth quarter of 2010 included several items that in aggregate resulted in a positive impact of $1 million or $0.03 per basic and diluted share to our earnings. These items included a $108,000 gain on early extinguishment of debt and a $933,000 gain on sales of available for sale securities. Income from continuing operations for the fourth quarter of 2009 included several items that in aggregate resulted in a positive impact of $412,000 or $0.01 per basic and diluted share to our earnings.

Now, turning to our ancillary businesses, the rehabilitation hospitals generated a fourth quarter EBITDAM loss of $421,000. Although hospital revenues were up $672,000 or 2.6% compared to last year, due primarily to increasing third-party insurance provider rates, they were offset by a decrease in occupancy, which decreased from 59.8% to 52.5%.

Hospital expenses as a percentage of revenues increased 60 basis points during the quarter due to the unfavorable leverage of decreasing occupancy and slight increases in labor and benefit expenses. Our pharmacy operations achieved a $186,000 margin in the quarter. Pharmacy revenues were up 2.6% compared with last year due to the impact of adding new customers which was partially offset by lower average revenues per prescription due to higher sales in generic drugs.

Total pharmacy expenses increased by 1.8% from the prior year due to higher costs associated with our rise in customer base. During the fourth quarter, general and administrative expenses increased $835,000 or 6.1% from last year, due to higher corporate and regional support costs primarily associated with communities who began to operate during the fourth quarter of 2009.

Our G&A cost as a percentage of revenues remained at 4.6% and are within our range of expectations. Rent expense increased $2.1 million or 4.6 compared to last year with most of this increase due to new acquisition rent expense of $1.1 million. Income tax expense was $518,000 in the fourth quarter.

During the fourth quarter, we reclassified the operations of three skilled nursing facilities located in Georgia in to discontinued operations. These properties are leased from senior housing and are in the process of being sold. Additionally, we decided to continue to operate one assisted living community that was previously included in discontinued operations.

Let me now review our liquidity, cash flow and selected balance sheet items. Cash provided by operating activities in the fourth quarter was a loss of $1.3 million, due to seasonal considerations and working capital usage. During the fourth quarter, we repurchased a small amount of convertible debt for a total outlay of $3 million and for the year, we repurchased a total of $11.8 million of convert l debt.

At December 31, we had cash and cash equivalents of $20.8 million. We continue to have nothing drawn on our $35 million revolving line of credit and we’re in full compliance of all covenants. Today our balances remain undrawn.

Consolidated EBITDA excluding certain items noted in our press release increased 118% to $10.7 million from $4.9 million last year. We made $17.2 million of capital investments during the quarter and sold $8.1 million of capital improvements to senior housing.

Our accounts receivable management remains strong as the number of days sales outstanding for our consolidated operations was 20.3 days at December 31, which remains very low and well controlled. At the end of the fourth quarter, we had $214 million of net property and capital, which includes the 26 properties directly owned by Five Star, 24 of which are encumbered by debt.

We have $37.7 million of convertible senior notes and $7.7 million of long-term HUD mortgages outstanding. We believe we are in compliance with all material terms of our credit, note and mortgage agreements.

In closing, we remain focused on increasing our occupancy and as Bruce mentioned, we are taking active steps by making investments in marketing and sales initiatives to do so. We continue to invest significantly in our capital upkeep of our properties and have been rewarded with an average comparable community rate increase of 3.2% over the last six quarters.

For the full year 2010, we revisited and refined our cost controls and experienced an 80 basis point reduction in wages and benefits and a 60 basis point reduction in other senior living operating costs. We are confident that our improved processes will provide tail winds as we enter 2011.

We are well positioned to capture strong margins and flow through as we increase our occupancy and are well positioned to make profitable acquisitions. With that I would like to open it up to questions for Bruce and I. Thank you very much.

Question-and-Answer Session


Thank you. (Operator Instructions) And the first question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

Hi. So a couple of things, just -- one on just unit counts, because I wasn’t sure some of that -- the stuff you’ve moved in and moved out was in sort of the numbers for the quarter or not. So on just senior housing and skilled nursing, do you have unit counts there but it’s in the continuing operations as we go in to the first half of the year?

Bruce Mackey

Jerry, this is Bruce. I don’t know if you’ve got it exact, but ballpark I think we took about 300 snif units, 250 to 300 out and we probably put back in about 125 AL units, somewhere in that range.

Jerry Doctrow – Stifel Nicolaus

Okay. And maybe we can just get this number off line and then just on the converts, I mean -- I guess I was trying to understand whether there’s a strategy of continued purchases or just how should we be thinking about sort of go forward?

Bruce Mackey

Jerry, if we can buy converts in that 95% range, we’re a buyer at this point in time.

Jerry Doctrow – Stifel Nicolaus

Okay. So may be continued small purchases but not -- you wouldn’t expect anything aside?

Bruce Mackey


Jerry Doctrow – Stifel Nicolaus

Okay. And do you have the exact interest expense on the converts for the quarter? Because, we need to just take it out to get the adjustments to the share count. I didn’t see that.

Paul Hoagland

Yeah. Jerry this is Paul Hoagland. I will follow up offline and get that to you right after the call.

Jerry Doctrow – Stifel Nicolaus

Okay. And then, I guess, just on sort of the broader parts of the business, may be two or three questions, if you could…

Paul Hoagland


Jerry Doctrow – Stifel Nicolaus

… it sounded like basic senior housing, other than some ups and downs for end of the year occupancy and stuff, you are feeling relatively good about. Skilled nursing, if we sort of take out -- would those units that you put into discontinued ops make any significant difference there or you are expecting occupancy to come back there? I guess, I’m just trying to get a little color on each of those and then maybe there are -- in the pharmacy as well?

Bruce Mackey

I’ll start at least with the occupancy piece. Our single business, the AL and IL was very consistent with where it was in the third quarter and the fourth quarter. We get -- in the fourth quarter on skilled nursing side.

The properties that we put in discontinued, I don’t think really moves the needle that much as you know a lot of our skilled nursing facilities are in rural areas and that’s where we saw the significant impact. We were down about little over 100 basis points. It started to come back, I can say that though in January and February, so far.

Jerry Doctrow – Stifel Nicolaus

And do you expect more benefit from RUGS 4 as you roll in to the first quarter?

Paul Hoagland

I wouldn’t say we expect more benefit probably we expect the benefit that we saw in the fourth quarter to continue.

Jerry Doctrow – Stifel Nicolaus

Okay. And then, I guess on us, I mean, you talked a little about strategy of trying to do the satellites. When do you expect knowledge, you have got approval, when do you expect that satellite facility to move and will it impact the numbers much? And then just your broader thinking about that space?

Paul Hoagland

What we expect to be done by the end of the year. So literally, a facility is being built, we’ve got the determination of need that was approved by the state in the fourth quarter. That will happen by the end of the year. Buying construction, heading on time and we expect well at this point so far. Yeah, we expect that’s a significantly improved one in patient location margins.

Will that be enough to get us to breakeven on a consistent basis? Possibly, possibly not. I think when you combine that with the traumatic brain unit that we just opened, again, I will take some time. Bu the early indicates that that unit is performing well and we expect to continue to perform well and they improve overtime.

You know, you combine those two units and then we get that much closer. If we are successful in other negotiations that we have in terms of potentially relocating other inpatient satellite unit or additional inpatient satellite unit, I think we’ll be very at that point, now we’re talking profitability, not being close.

Jerry Doctrow – Stifel Nicolaus

So just thinking about it, we should be thinking about this loss, may be very well gradually working down, but there will still be a loss for this year because you won’t see the new unit open until late in 2011. So maybe break even 2012, we would still see some loss for this year, that’s kind of what your thinking is?

Bruce Mackey

Correct. Yeah. That’s fair.

Jerry Doctrow – Stifel Nicolaus

Okay. And how about just on the pharmacy?

Bruce Mackey

Pharmacy, like I said, we did lose some contract and our occupancy was down. We know we expect that to come back a little bit. We have got several -- most of the customer additions that I’m talking about in some quarters are very bullish, it will be mostly Five Star or mostly third party.

You know, right now we got a lot of Five Star units that we are looking to add as we got direct control and expect us to come on line over the next several quarters. So I expect that we were at 12.6 at the end of the third quarter, we were 12.1 at the end of the fourth quarter. By the end of the year, we should be close to that 13,000 number if not, a little bit more than that.

Jerry Doctrow – Stifel Nicolaus

Okay. And then for the margins …

Bruce Mackey

Will come back as well. That’s correct. Yeah.

Jerry Doctrow – Stifel Nicolaus

Okay. And strategically you talked about, I think, on the last call, just thinking about strategic options for both the -- maybe the ERF and the pharmacy, any update on that?

Bruce Mackey

No. No significant updates. You know, we talked about if these businesses work on microscope, they continue to be under a microscope, but no significant update.

Jerry Doctrow – Stifel Nicolaus

Okay. All right. Thanks. That’s all for me.

Bruce Mackey



(Operator Instructions) Seeing no additional questions at this time, I would like to turn the conference back to Mr. Bruce Mackey.

Bruce Mackey

Great. Thank you and thank you all for joining us on today’s call. We will be at the Jefferies Global Healthcare Conference in March in New York City. We hope to see some of you there. Thank you.


Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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