Five Star Senior Living Inc. (FVE) Q3 2019 Earnings Conference Call November 6, 2019 1:00 PM ET
Michael Kodesch - Director-Investor Relations
Katie Potter - President and Chief Executive Officer
Jeff Leer - Executive Vice President, Chief Financial Officer and Treasurer
Margaret Wigglesworth - Chief Operating Officer
Conference Call Participants
Good day and welcome to the Five Star Senior Livings Third Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations, please go ahead.
Thank you. Welcome to Five Star Senior Livings call covering the third quarter 2019 results. The agenda for today's call includes a presentation by Katie Potter, President and CEO; Margaret Wigglesworth, Senior Vice President and COO and Jeff Leer, Executive Vice President, CFO and Treasurer. Following this presentation, the management team will open the floor to a question-and-answer session with research analysts.
I would like to note that the transcription, recording, and retransmission of today's conference call is strictly prohibited without the prior written consent of Five Star. 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, Wednesday, November 6, 2019.
The Company undertakes no obligation to revise or publicly release the results in any revision to the forward-looking statements made in today's conference call other than through the filings with the Securities and Exchange Commission or SEC regarding this reporting period.
In addition, this call may contain non-GAAP numbers, including EBITDA adjusted EBITDA and pro forma EBITDA. Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate EBITDA and adjusted EBITDA and pro forma EBITDA are in our quarterly news release available on our website at www.fivestarseniorliving.com
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 within the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements.
I will now turn the call over to Katie.
Thanks, Michael, and thanks everyone for joining us on our third quarter earnings call. The third quarter of 2019 marks another period of demonstrated progress in Five Stars transformations. The transaction to restructure our existing business arrangements with SNH remains on track to close on January 1, 2020.
While one-time non-recurring expenses incurred in the quarter along with our continued investment in our workforce weighted heavily on quarterly results through outsized expense growth, we know that these investments were by designed and within management expectations as we build a strong operational foundation moving into the new year.
As a direct result of these initiatives, Five Star reported a net loss of $7.1 million and a $2.9 million loss and adjusted EBITDA in the third quarter. However, giving effect to the completion of the restructuring transaction within SNH, Five Star would have generated net income of $4.1 million and EBITDA $8.3 million on a pro forma basis.
As a reminder, the restructuring transaction principally includes terminating releases and management agreements for all senior living communities we leased from and managed for the accounted SNH and replacing those leases and management agreements with new management agreements.
We have also executed several additional potential transactions pursuant to the restructuring with SNH that have improved our financial position and provided us with a source of liquidity. Specifically, fixed rent payments under the SNH leases were reduced from $17.4 million to approximately $11 million per month effective February 1, 2019.
When we entered into the transaction agreement, SNH purchased the majority of the property, plant and equipment related to the SNH lease communities for approximately $50 million. The equivalent of those assets depreciated book value. Any capital improvements made at lease communities during the transition period April 1, 2019 to January 1, 2020 are being funded by SNH directly.
SNH provided us with a $25 million credit facility secured by six of our owned communities. On June 12, 2019, we entered into a third amended and restated credit facility, pursuant to which we now have a $65 million secure revolving line of credit.
And finally, on the conversion date, we expect to issue shares to SNH and SNH's shareholders, as approved by our shareholders on June 12, 2019, and SNH will pay off $75 million of consideration for the share issuances. As a result, this transaction which immediately improved our cash position will also position Five Star for stable long term growth.
Before I turn the call over to Margaret [ph] to discuss senior living operational results, I'd like to give an update on the progress of our key initiatives. First, our investment in our team members remains paramount to the sustainability and growth of our business.
As highlighted by the recent J.D. Power senior living satisfaction study, which measures resident and family satisfaction with the nation's largest senior living providers. The key to providing an exceptional resident experience is ensuring the community has team members that communicate clearly personally relate to their residence and make residents feel part of a community.
I'm pleased to report that Five Star stood at third place in the 2019 edition of J.D. Power study, up five spots from the 2018 iteration of the report. Part of the commitment to retain and motivate our team members includes the recognition through compensation.
Continued investment in our team members through increases in base pay while also bringing in top tier talent within each market will ultimately drive resident and family satisfaction as well as long term profitability at the community level.
In the third quarter, we hire 23 new executive directors that are communities and company wine team members turnover for the quarter average 4.63% compared to 5.01% for the same period last year, and was roughly 40 basis points below the 5.03% turnover experience in the prior quarter.
We want to continue to attract and retain the best talent and we intend to do so by providing them the tools necessary to be successful, recognizing and rewarding those successes and building a culture of accountability, transparency and innovation. As a result, total wages and benefits were up $5 million or 3.5% compared to the same period last year.
We continue to focus on providing an exceptional resonant experience in our communities through our partnership with J.D. Power with respect to their senior living community certification programs. I'm proud to report that Five Star has 26 communities in five states that have received the J.D. Power Senior Living Certification, adding four communities in the quarter.
While our goal is to continue to add to the number of Five Star communities that received this value certification, our primary focus remains to drive operational excellence consistent with the over 170 J.D. Power operational best practices. Ageility Physical Therapy Solutions our rehabilitation and wellness division continues to be a focal point of growth for Five Star, as it not only diversifies the Company's revenue streams but also acts as a critical touch point to source new residents and clients to our community.
We reported revenues of $12.1 million, which is a 41% increase compared to the third quarter of last year, and up 9% sequentially. There were an additional 31 net new clinics opened in the third quarter.
New clinic startups continue to show a good cadence in excess of our annual projection of 30 new clinics in 2019. Opportunities for growth in 55 plus communities were realized in the third quarter, and as a result, Ageility has expanded its target market. And might have these opportunities, Ageility continues to evaluate growth potential and fitness offering for older adults.
And finally, Five Star made a critical investment in creating efficiencies across its vendor sourcing platform with a $1.85 million one-time expense attributable to the arms and base communities, which Jeff will more fully detail in his prepared remarks. This investment was deliberate and will continue -- and will contribute to a strong operational foundation moving into the New Year.
Now, I'd like to turn the call over to Margaret who will address our senior living operational performance for the quarter.
Thanks, Katie. I'd like to start by saying that it's an exciting time to be joining Five Star. In the short time I've been here, I've had the opportunity to visit several communities and I'm truly encouraged and inspired by the commitment of team members to provide an exceptional experience to our residents and clients.
We've enhanced financial stability and an improving fundamental outlook, there's immense potential for an enacting positive change, not only in our business, but also in the daily lives of older adults for whom we serve. I look forward to continuing to meet and work with many Five Star team members in the near future, as we embark on this critical next stage of Five Stars evolution.
Moving to operational results, in the third quarter, we reported total occupancy of 82.9% which is up 90 basis points compared to the same period last year and down 10 basis points sequentially. Average monthly rate for our lease and owned communities was down 1% year over year. On a comparable senior living community basis, revenue increased 1.5% compared to the same period last year. Subsequent to quarter end, we made a strategic hire to further accelerate our revenue management platform.
I will now turn the call over to Jeff for discussion on the financial results.
Thank you, Margaret. Earlier this morning, we reported $270 million for senior living revenues for the third quarter of 2019, a decrease of $3.7 million or 1% compared to the same period last year, largely due to SNH sales of 18 skilled nursing facilities starting the second and third quarters of 2019.
Comparable community senior living revenue; however, was up $3.9 million for 1.5% which was driven primarily by modest increases in occupancy. We also experienced revenue growth in our Ageility division and expect to continue this trajectory throughout the remainder of the year.
We recorded a loss of $7.1 million for the third quarter of 2019. As compared to the third quarter of 2018, net loss decreased to approximately $14.5 million primarily driven by the impact of the transaction agreement with SNH which reduced monthly rent rates that was offset by roughly $5 million and increased wages and benefits.
On an adjusted EBITDA basis, we recorded a loss of $3.9 million, which includes one-time expenses attributable to our strategic sourcing initiatives and salary wages to support the disposition of certain communities. And virtually on a pro forma basis, giving the effect to the completion of the transaction with SNH, we would have recognized net income of $4.1 million or $0.13 per share and approximately $8.30 million of EBITDA.
Senior living wages and benefits increased 3.5% year-over-year to $147 million, which is approximately 54% of senior living revenue. And on a comparable community basis, senior living wages and benefits were up 6.9%. This quarter's increase in wages and benefits is due to the combination of increasing the standard pay attributable to our continued focus on investing in our team members in addition to contract labor cost to support the disposition of certain communities.
Other senior living operating expenses for the quarter were $78.2 million, an increase of 1.9% from the third quarter last year. On a comparable community basis, other operating expenses increased approximately $3 million or 4.2% compared to the same period last year. These increases were primarily due to a one-time 1.85 expense related to investments made in our strategic sourcing initiatives that we expect to provide future-sustained long-term savings benefits.
While it will likely take 9 to 12 months for this initiative to fully ramp up, we estimate the annualized savings will amount to approximately $8 million to $10 million. We also experienced increases attributable to property and casualty insurance expense of $589,000 as a result of decreased capacity in the insurance market.
General and administrative expenses were 20.1 million for the third quarter and included $1.3 million of transaction costs related to the restructuring transaction with SNH. Excluding these costs, general and administrative expenses were $18.8 million which is slightly less than G&A expense incurred at the same period of the previous year.
Interest expense in the third quarter was just under $400,000, a decrease of 17.6% compared to the same period last year due to lower borrowings on our credit facility. At September 30, we had approximately $39.4 million of cash and cash equivalents. As of today, we do not have any borrowing outstanding on our new credit facility or our line of credit with SNH.
With that, I turn the call back over to Katie for closing remarks.
Thanks, Jeff. In 2019, we continue to strategically reposition Five Star laying the foundation for sustained long-term growth. A critical component of this is the completion of the restructuring of our business arrangement with SNH, as reflected in our pro forma third quarter results of $4.1 million of net income and $8.3 million of EBITDA.
Additionally, we continue to invest in our team members and make strategic investments across our platform. I'm confident in our ability to continue to make great progress toward our initiatives while securing financial stability for our future.
I will now turn the call back over to our operator for questions.