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Edited Transcript of FVE earnings conference call or presentation 2-Mar-20 6:00pm GMT

Q4 2019 Five Star Senior Living Inc Earnings Call

NEWTON Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Five Star Senior Living Inc earnings conference call or presentation Monday, March 2, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey C. Leer

Five Star Senior Living Inc. - Executive VP, CFO & Treasurer

* Katherine E. Potter

Five Star Senior Living Inc. - President & CEO

* Margaret S. Wigglesworth

Five Star Senior Living Inc. - Senior VP & COO

* Michael B. Kodesch

Diversified Healthcare Trust - Director of IR

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Presentation

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Operator [1]

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Good day, and welcome to the Five Star Senior Living Fourth Quarter 2019 Financial Results Conference Call. (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.

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Michael B. Kodesch, Diversified Healthcare Trust - Director of IR [2]

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Thank you. Welcome to Five Star Senior Living's call covering the fourth quarter 2019 results. The agenda for today's call includes a presentation by Katie Potter, President and CEO, Jeff Leer, Executive Vice President, CFO and Treasurer; and Margaret Wigglesworth, Senior Vice President and COO. 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 or 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, Monday, March 2, 2020.

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. 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, 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 with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. I will now turn the call over to Katie.

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Katherine E. Potter, Five Star Senior Living Inc. - President & CEO [3]

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Thanks, Michael, and thanks, everyone, for joining us on our fourth quarter earnings call. On January 2, 2020, we announced the completion of the transaction to restructure our business arrangements with Diversified Healthcare Trust or DHC, effective January 1, 2020, which marked a pivotal milestone in Five Star's transformation as the company ushers in a new era of expected stability and growth.

As a reminder, the restructuring transaction principally included terminating the leases and management agreements for all senior living communities we leased from and manage for the account of DHC as of December 31, 2019; and replacing those leases and management agreements with new management agreements.

Under these new contracts, Five Star will earn a base fee of 5% of community-level revenues, a construction management fee of 3% of the capital that DHC invests and the opportunity to earn an incentive fee on 2021 calendar year performance and beyond.

Additionally, in accordance with terms of the transaction, DHC is responsible for $75 million of additional consideration in the form of the assumption of working capital liabilities, which will be paid post-closing in 2020. As a result, this transaction, which immediately improved our liquidity also positioned Five Star for stable long-term growth.

Now that we have successfully completed the transaction, and in an effort to provide clarity with respect to Five Star's financial position, we believe the pro forma results are a better representation of the earnings power of the company moving forward.

Giving effect to the completion of the restructuring transaction with DHC, Five Star would have generated net income of $5.8 million or $0.18 per diluted share and EBITDA of $10.5 million on a pro forma basis.

Before I turn the call over to Margaret to discuss senior living operational results, I'd like to give a brief update on our key initiatives as well as a reaffirmation of our strategy moving forward.

First, an update on our team member-focused initiative. Five Star believes that recruiting and retaining the best talent will drive results at all levels of the organization, but it is particularly important at the community and clinic level to support an exceptional resident and client experience. Therefore, we will continue to work toward attracting, selecting and retaining talented individuals uniquely suited to be successful at Five Star. We will also provide our team members with the tools necessary to be successful, including increased training and development opportunities in order to build an environment that prioritizes learning so that each team member can contribute to the success of Five Star.

As demonstrated by Five Star's investment of $39 million in salaries and wages in 2019, we will continue to recognize and reward those contributions and successes. In return, all team members will be expected to reframe challenges as opportunities, execute with excellence and grow and foster a culture of accountability, transparency and innovation. To further these initiatives, in the fourth quarter, we successfully redesigned the Executive Director incentive plan and made a strategic investment in a new learning management system, including an electronic learning platform. We also created a new communications function so that we may more effectively engage with our team members.

Further, driven by our focus on providing an exceptional resident experience at each of our senior living communities, we hired a new divisional Vice President of senior living operations; 3 new Senior Regional Directors of senior living operations, 5 new Regional Directors of senior living operations and 82 new Executive Directors at our community.

Our team member-focused initiatives are building traction and have resulted in company-wide team member turnover for the quarter that averaged 47.3% compared to 53.8% for the same period last year and was well below the 56.8% turnover experienced in the prior quarter.

We continue to focus on providing an exceptional resident experience in our communities through our partnership with J.D. Power with respect to their senior living community Certification program. I'm proud to report that Five Star has 32 communities in 6 states that have received the J.D. Power Senior Living Certification, adding 4 communities in the quarter. We expect our cadence of certifications in 2020 to resemble the fourth quarter 2019 pace.

While our goal is to continue to add to the number of Five Star communities that receive this value certification, our primary focus remains to drive operational excellence consistent with the over 170 J.D. Power operational best practices.

As we have stated previously, we invested in a more pragmatic approach to establish rates at our communities through introducing revenue management back in 2018. Throughout the fourth quarter, revenue management has been active in executing several programs designed to refine governance around our pricing model that will optimize the balance between pricing and occupancy.

At the end of the fourth quarter, we were able to establish a company-wide sales rate increase to take full year effect beginning in 2020 and set standards related to community fees and room discount practices. We estimate that our strategies will take hold during Q1 2020 and achieve normalized benefits starting in Q2 2020.

And finally, Ageility, 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 stream, but also acts as a critical touch point to source new residents to our community. Ageility reported revenues of $13.6 million, which is a 44% increase compared to the fourth quarter of last year, and up 13% sequentially. There were an additional 13 net new clinics opened in the fourth quarter. Additional opportunities for growth in active adult communities were realized in the fourth quarter, and as a result, Ageility continues to grow in this new market.

As I mentioned earlier on the call, the completion of the transaction with DHC was a defining moment for Five Star. As a result of this transaction closing, we expect our cash position to be stable moving into 2020 and beyond. In addition, our new management contracts provide more predictability in EBITDA derived from those communities that we manage on behalf of DHC.

While our financial position in 2020 has vastly improved from that of 2019, we want to be clear that our near-term focus remains largely centered on operational improvement and stability. The senior living industry has been tested nationwide by adverse demographic trends, supply headwinds and labor pressures. Five Star's portfolio has not been immune to these challenges. Despite these vigorous conditions, Five Star will be nimble and innovative in devising a unique, comprehensive approach to meeting the ever-changing needs of older adults.

The NIC data is beginning to show improvement to industry fundamentals as the development of new senior living assets have started to decelerate and the target customer demographic shows significant growth over the next decade. Now more than ever, we need to continue to drive a consistent and exceptional resident experience in order to capitalize on these trends. Additionally, we are continually working with our largest partner, DHC to employ a holistic capital plan to improve the competitive positioning of our assets. In combination with our operational goals, we believe DHC's deployment of these capital improvements across Five Star's portfolio will lead to increased occupancy and rate and subsequently enhance overall returns.

Finally, we are excited to welcome Dr. Michael Wagner as an Independent Director; and Jennifer Clark as a Managing Director to the Five Star Board. We believe the addition of Dr. Wagner's more than 20 years of practical experience as a physician as well as the perspectives from his leadership experience working in and managing large patient-centered health care providers will be invaluable to Five Star. In addition, Ms. Clark has been instrumental in overseeing RMR's senior living medical office and life science business over the years and has extensive management experience. With the addition of Dr. Wagner and Ms. Clark, Five Star now has 7 directors, 5 of which are independent and 3 of which are women. Now I'd like to turn the call over to Margaret, who will address our senior living operational performance for the quarter.

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Margaret S. Wigglesworth, Five Star Senior Living Inc. - Senior VP & COO [4]

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Thanks, Katie. In the fourth quarter, we reported total occupancy for our owned and leased portfolio of 82.9%, which was flat to both the prior year quarter and sequentially. Average monthly rate for our leased and owned communities was down 2.1% year-over-year. On a comparable senior living community basis, revenue increased 1.4% compared to the same period last year. At Five Star, we've established new teams and processes to address operational challenges. In addition, we further refined our organizational structure to better align our divisional teams and enhance their ability to execute across our platform. These investments are the foundation upon which we are building both the ability to analyze trends and proactively identify and address potential areas of concern before issues arise. For example, in Q4, we identified region's experiencing significant labor challenges. We were able to proactively assemble interdisciplinary teams from operations, human resources, health and wellness and finance to assess the issues and develop action plans to resolve them.

Over Q4 and into Q1 of this year, we are working towards stabilizing the labor force in these regions and most critical positions have been filled. We are following up with targeted training to ensure that we continue to provide an exceptional resident experience and secure the future growth of our communities.

Before passing the call to Jeff, we wanted to provide a brief comment on recent news about the coronavirus. The safety of our team members and residents is paramount. As such, we have enhanced our processes and procedures related to contagious viruses like the flu to adapt to these circumstances. Our teams are well prepared to identify and address any concerns that may arise and are ready to respond should this issue impact our communities. I will now turn the call over to Jeff for a discussion on the financial results.

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Jeffrey C. Leer, Five Star Senior Living Inc. - Executive VP, CFO & Treasurer [5]

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Thank you, Margaret. Earlier this morning, we reported $264 million of senior living revenues for the fourth quarter of 2019, a decrease of $12.6 million or 4.6% compared to the same period last year, largely due to DHC sale of 18 skilled nursing facilities during the second and third quarters of 2019. Comparable community senior living revenue was up $3.5 million or 1.4% due to the result of onetime benefits attributable to the recognition of deferred fees associated with the closing of the transaction with DHC.

We also experienced revenue growth in our Ageility division and expect to continue this growth trajectory into 2020. We reported net income for the fourth quarter of 2019 of $16.1 million or $3.15 per diluted share compared to a loss from continuing operations of $4.75 per share for the same period in 2018. This included $12.4 million or roughly $2.43 per diluted share of lease inducement related to the rent reduction, largely recognized in December 2019 as a result of the completion of the transaction with DHC. After backing out transaction costs, the onetime lease inducement and other onetime community fees, we reported fourth quarter adjusted EBITDA of $4 million.

As Katie discussed earlier, we have provided a pro forma of our fourth quarter 2019 results within our earnings release. Giving effect of the completion of the restructuring transaction with DHC, Five Star would have recognized net income of $5.8 million or $0.18 per diluted share and an EBITDA of $10.5 million on a pro forma basis.

Turning to expenses for the quarter. Fourth quarter comparable senior living wages and benefits increased 3.2% year-over-year to $135.1 million, which is approximately 52% of senior living revenue. This quarter's increase in wages and benefits is due to the combination of increases in standard pay attributable to our continued focus on investing in our team members in addition to contract labor costs.

Other senior living operating expenses for the quarter were $70.3 million, a decrease of 6.1% for the fourth quarter last year. On a comparable community basis, other operating expenses increased approximately $440,000 or just 0.6% compared to the same period last year.

General and administrative expenses were $20.7 million for the fourth quarter and included $1.8 million of transaction costs related to the restructuring transaction with DHC. Excluding these costs, general and administrative expenses were approximately $19 million, which is roughly $1.1 million less than G&A expenses in the same period of the previous year after excluding onetime severance expense incurred in the fourth quarter of 2018.

Interest expense for the fourth quarter was roughly $400,000, a decrease of 66% compared to the same period last year due to lower borrowings on our credit facility. At December 31, we had approximately $31.7 million of cash and cash equivalents and $7.5 million of outstanding debt obligations. As of today, we do not have any borrowings outstanding on our credit facility.

With that, I will turn the call back to Katie for closing remarks.

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Katherine E. Potter, Five Star Senior Living Inc. - President & CEO [6]

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Thanks, Jeff. With the transitional year of 2019 now firmly behind us. We are focused on stabilizing operations at Five Star and further laying the foundation for sustained long-term growth. Additionally, as we continue to focus on our team members and make strategic investments across our platform, we believe Five Star will be greatly positioned to maximize value for shareholders through the burgeoning opportunities in senior living and in the provision of services to older adults. I'm confident in our ability to continue to make great progress toward our initiatives while maintaining financial stability for our future. I will now turn the call back over to our operator for questions.

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Operator [7]

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(Operator Instructions) There are no questions in the queue. This concludes our question-and-answer session and the conference. Thank you for attending today's presentation. You may now disconnect.