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Edited Transcript of FVE earnings conference call or presentation 15-May-18 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Five Star Senior Living Inc Earnings Call

NEWTON May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Five Star Senior Living Inc earnings conference call or presentation Tuesday, May 15, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Shepherd

* Bruce J. MacKey

Five Star Senior Living Inc. - CEO & President

* R. Scott Herzig

Five Star Senior Living Inc. - Senior VP & COO

* Richard A. Doyle

Five Star Senior Living Inc. - CFO & Treasurer

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Presentation

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Operator [1]

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Good morning, and welcome to the Five Star Senior Living First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brad Shepherd, Director of Investor Relations. Please go ahead

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Brad Shepherd, [2]

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Thank you. Welcome to Five Star Senior Living's Call covering the First Quarter 2018 Results. The agenda for today's call includes a presentation by Bruce MacKey, President and CEO; Rick Doyle, CFO and Treasurer; and Scott Herzig, Chief Operating Officer. Following this presentation, the management team will open the floor to a question-and-answer session for research analysts. I would like to note that the transcription, recording and re-transmission 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, Tuesday, May 15, 2018. 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 the 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.

I will now turn the call over to Bruce MacKey, Five Star's President and CEO.

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Bruce J. MacKey, Five Star Senior Living Inc. - CEO & President [3]

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Thanks, Brad, and thanks, everyone, for joining us on our first quarter 2018 earnings call. Total company adjusted EBITDA for the first quarter of 2018 was down $7.5 million compared to the same period last year. This decrease is a result of comparable community EBITDA down $4.8 million, a $1.7 million reduction in EBITDA from the 4 sold communities, and a $1 million increase in rent expense as compared to last year. Skilled nursing revenue, which was down $3.2 million or 4% in our comparable communities, continues to be the biggest driver in our year-over-year decline.

Both our CCRCs and our standalone skilled nursing communities produced $38 million to $40 million each of skilled nursing revenue on a quarterly basis. Yet 80% of the year-over-year decline in SNF revenue came from our standalone skilled nursing communities. Occupancy at these standalone communities was 75.7%, down 410 basis points from the first quarter of 2017.

On an EBITDA basis, our standalone SNF accounted for 53% of the $4.8 million decline year-over-year. Our top 5 largest declining SNFs year-over-year accounted for this entire $2.6 million decline in EBITDA with the largest year-over-year decrease of $1 million coming from our largest standalone SNF with 200-plus units located just outside of Milwaukee.

We experienced a clinical issue at the community and it was unable to admit new residents for a significant period. The issue has been resolved, and we are working to stabilize this community. This occurrence was unfortunate as we take pride in our clinical operations. Almost 90% of our skilled nursing units are rated at 3 stars or above by the centers of Medicare and Medicaid services, and we have worked very hard to improve our clinical ratings over the past several years.

The remainder of the EBITDA decrease in our SNF segment are a result of occupancy loss due to the flu and attrition, in general. In the first quarter, NIC released its latest skilled nursing data report which, for the first time, showed urban versus rural skilled nursing trends. This report showed pronounced differences in occupancy trends between urban and rural communities with rural occupancy rates declining more sharply. With the majority of our standalone SNFs located in rural markets, this occupancy trend is noticeably affecting us.

While talking about our standalone skilled nursing operations, I would like to mention that we are currently under agreement to sell a 97-unit standalone skilled community located outside Los Angeles. This will be the first skilled nursing community that will have sold since 2016, and we plan on being opportunistic with sales of these communities in the future. As a result of this disposition, our rent payable at SNH will decrease approximately $650,000 annually.

On the private pay side of the business for comparable communities, we saw a 1% decrease in independent living, assisted living and Memory Care revenues at the comparable communities in the first quarter compared to the same period last year. Independent living and assisted living revenues combined were flat as decreases in occupancy were offset with increases in rates in these lines of businesses. Memory Care was the portion of the private pay business where we were not able to overcome occupancy loss with increased rates as this has been the fiercest source of competition over the past year.

Memory Care revenues were down 5.6% in the first quarter compared to the same quarter last year. We have started to mitigate the effects of Memory Care competition with our revenue management systems, which Scott will talk about more later.

In the fourth quarter, we entered into a sale manage-back agreement with Senior Housing Properties Trust to sell 6 senior living communities for an aggregate sale price of approximately $104 million. As of March 31, we have sold 4 of the 6 communities for approximately $81 million. We expect the 2 remaining communities to close during the second quarter.

Turning now to our capital investments and expansion opportunities. We spent approximately $10 million in capital expenditures in the first quarter and did not sell any of this capital back to our landlord from our leased communities. Our average capital spend per quarter in 2017 was approximately $18 million with 55% funded by our landlord.

The first quarter lower-than-average spend was simply a result of project timing. We still expect our expenditures in 2018 to match the $70 million in 2017 with a similar percentage to be funded by our landlord. The largest project over the past 2 years in our leased portfolio at The Forum at Park Lane, a CCRC in Dallas, Texas, recently finished converting over 40 units of independent living apartments into 46 assisted living units. These units have been out of service since the middle of 2016.

The newly converted units are now among some of the nicest assisted living units in the entire Dallas market. We are waiting for the state inspection and once the community receives its license, the residents from the community's existing assisted living units will move to the new assisted living building. 33 units will be occupied once we have the license, and we expect the remaining 13 units to lease quickly.

Once the residents move out of the community's old assisted living units, we will be converting those units into Memory Care. This will allow us to care for some of our existing residents as opposed to them leaving us for a higher level of care. This portion of the project will take significantly less time than the assisted living conversion and will cause less disruption to the community in general.

We continue to evaluate other expansion and conversion projects to take advantage of opportunities in certain markets. We have 3 expansion projects estimated to start later this year that will add units to communities where demand dictates. This includes the addition of 48 Memory Care units to a CCRC in Delaware that we expect to start in August of this year.

We also continue to evaluate the conversion of skilled nursing units in some of our CCRCs to short-term rehabilitation suites, known as our Rehab to Home program. This month, we received the license from the state to open our latest 22-unit Rehab to Home project at a leased community in the Columbus, Ohio market, and we expect to start admitting new residents shortly. We will start construction on a 29-unit Rehab to Home project at a leased CCRC in Delaware soon with anticipation to have these units up and running in the first quarter of 2019.

In our own portfolio in Indiana, all the code-compliant work has been completed to convert 5 communities with 450 independent living units to assisted living units. As we stated in past calls, the construction was completed in the third quarter of 2017. However, we will wait on the state to approve our licenses to operate as assisted living in each of these communities.

In March, 2 communities received their licenses, but we are still waiting on the state to approve the remaining 3. These communities will be converted to better serve the evolving demand over the past several years. Upon obtaining their new licenses, we will reopening -- reopen or rebrand each community with the Five Star Residences of naming convention to highlight of repurposing of the units.

On growing the managed side of the business, we are currently in negotiations with SNH to transfer operations of the 70-unit assisted living community from another operator to us. Finally, I'd like to mention that our ongoing initiative to take advantage of opportunities and find growth internally, we are going to look at all of our skilled nursing units within our CCRCs and examine the feasibility and profitability of repurposing some of these units. I mentioned our Rehab to Home program earlier, but in addition to that program, we will determine if skilled units will be more profitable as other type of senior living operations where the demand is evident.

I would now like to turn the call over to Scott Herzig, Five Star's Chief Operating Officer, to talk about operations.

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R. Scott Herzig, Five Star Senior Living Inc. - Senior VP & COO [4]

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Thank you, Bruce. Total occupancy was 81.7% in the first quarter, down 90 basis points sequentially and down 190 basis points year-over-year. Total move-ins for the quarter outpaced the first quarter of last year by 1.3%, despite having more than 40 of our communities closed to admissions related to the flu. Although we acted quickly and successfully implemented our flu protocols at these communities, allowing them to resume admitting new residents, we could not keep pace with the accelerated attrition rate in the first quarter.

As the NIC continues to report, we, too, continue to see the impact of new construction and new openings in many of our markets, especially those in the secondary markets. That said, the month of March was a very good move-in month for us, and that continued into April, where we remained ahead of last year's move-in pace.

We are seeing a lot of positive activity and success related to our revenue management initiative and our increased level of dominance in the digital space. Our efforts to drive potential clients to our Five Star website improved, yet again, in the first quarter where we are now getting 22% of our move-ins directly from our own company website.

With regards to our revenue management program, in the first quarter, we hired a director of revenue management here in the Boston office, who came to us directly from the hotel industry. We now have approximately 1/3 of our communities actively using this program. And with the addition of a dedicated resource, this percentage should grow rapidly.

We have been focusing on implementing the system at lower occupied communities and our next step will be to focus on the communities with greater than 98% occupancy, where we can begin to push our rates immediately and drive up RevPAR. We are pleased with the revenue management work so far.

Our revenue managed communities are showing increased move-ins of about 8% year-over-year compared to those that are not on the system, which were slightly negative year-over-year. Our independent living and Memory Care units are producing the strongest results so far, and the long-term plan is to have a fully sustainable revenue management culture within our executive directors.

As we continue to work towards growing occupancy in this massively competitive environment, one of the additional challenges we are facing in our industry right now is a continual shortage of qualified employees, particularly at the executive director level. When looking at our CCRCs and leased independent and assisted living communities in the first quarter, a majority of the weaker performing communities, comparatively year-over-year, had some sort of transition related to the executive director.

I have talked frequently about Five Star's executive director training program called the Rising Star Program, where we groom and train our existing staff into successful executive directors. This program continues to produce excellent results. We have also established an executive director mentoring program that assigns a mentor to each executive director, whether they come from within the company or outside the company, and ensures an efficient transition when starting at a new community.

In addition, we have built Five Star University, which is aimed at further educating our new and existing executive directors in all aspects of running a community including, but not limited to, managing employees, marketing, financials and of course, senior care.

Finally, we recently came up with new strategies for attracting, engaging, retaining and developing talent labeled our workforce stabilization plan. These new strategies are aimed to set Five Star apart from our competition as the top employer in the senior living industry. All of these employment strategies go above and beyond the traditional means of attracting and retaining the very best employees in the senior living industry and they undoubtedly set us apart.

Now turning to a quick update on our Ageility Physical Therapy Solutions division. The first quarter was another solid quarter for this line of business. Revenues for the first quarter were $8.7 million, a 14% increase over the first quarter of 2017. We opened a total of 16 outpatient clinics in the first quarter, 4 of which are not affiliated with Five Star.

As of the end of the quarter, we now operate a total of 108 outpatient clinics, 10 of which are not affiliated with the Five Star community. We continue to have interest in this service amenity, and we'll look to add more outpatient clinics to this platform throughout 2018 and beyond.

I will now turn the call over to Rick Doyle, our Chief Financial Officer.

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Richard A. Doyle, Five Star Senior Living Inc. - CFO & Treasurer [5]

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Thank you, Scott, and good morning, everyone. For the first quarter 2018, our senior living revenue of $274 million decreased $7.9 million or 2.8% compared to the same period in 2017. $3.6 million or almost half of the decrease was a result of a reduction in revenue from the 4 communities sold to SNH, as Bruce discussed earlier. The remainder of the revenue decrease is a result of the decline in occupancy offset by both the increase in our average monthly rates and an increase in revenue from our Ageility Physical Therapy division.

Our management fee revenue was $3.6 million for the first quarter, an increase of 1.7% compared to the same quarter last year. We now manage 72 communities containing over 9,200 units. Senior living wages and benefits for the quarter were $136 million or 49.6% of senior living revenue. On a comparable community basis, senior living wages and benefits were up just 60 basis points from the same period last year.

Specifically, labor was up 1% and benefits decreased 5.1%. The decrease in benefits is due to changes in our health insurance program driving cost down as well as having less high-dollar claims compared to the first quarter of last year. Each quarter I talk about how well we control our wages and benefits, and we continue to look for new ways to improve and become more efficient when it comes to our community employees' wages.

Recently, we started utilizing a third-party software to help ensure time tracking compliance to reduce our overtime costs. It is early in the implementation of this overtime initiative with 2 regions covering 36 communities currently using it. We are continually assessing the feasibility to roll out these services to other regions and expect to see positive results from it in the near future.

Other senior living operating expenses for the quarter were $74 million or 26.9% of senior living revenue. On a comparable community basis, operating expenses increased approximately $1 million or 1.5%. Similar to our wages and benefits expenses, we continue to look for ways to reduce operating expenses whether it be through leveraging our size to negotiate national purchasing contracts or finding a more cost efficient means of operating.

As an example, in late 2017, we initiated a migration of our telephone infrastructure to an Internet-based communication system. This system will allow phone companies to provide us with a lower-cost product with equal or better quality but with significant technological advantages. We expect this initiative to be completed by the end of the second quarter.

General and administrative expenses were $20 million for the first quarter, an increase of approximately 2.2% compared to the same period last year. G&A as a percentage of our revenue from communities we own, lease and manage was 5.3%. Rent expense for the quarter was $52 million, an increase of 2% compared to the same period last year. The increase primarily relates to rent increases from capital improvements that were sold back to our landlord at our leased communities. We reported a loss on continuing operations of $0.16 per share compared to a loss on continuing operations of $0.14 per share for the same period in 2017.

Turning to our liquidity cash flows and selected balance sheet items. At March 31, we had $31.2 million of cash and cash equivalents and nothing outstanding on our revolving credit facility that is secured by 10 of our owned senior living communities. At March 31, we had approximately $252 million of net property and equipment that included 20 communities we own and $22 million of net property and equipment classified as held-for-sale that includes the 2 communities yet to be -- to close on the sale manage-back transaction.

SNH agreed to assume approximately $34 million of mortgage debt in relation to 3 of the 6 communities to be sold. In December, January and February, we sold 4 of the 6 communities to SNH for approximately $81 million, and we expect to sell the remaining 2 communities during the second quarter for approximately $23 million with $17 million of mortgage debt to be assumed as third-party approvals are received. After the transaction is complete, we will have one mortgage note remaining with a principal balance of approximately $8.1 million with an interest rate of 6.2% due in September 2032, encumbering one senior living community.

With that, I will turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And this includes our question-and-answer session. I'd like to turn the conference back over to Bruce MacKey for any closing remarks.

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Bruce J. MacKey, Five Star Senior Living Inc. - CEO & President [2]

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Great. Thank you. I'd like to thank everybody for joining us on our first quarter call, and we look forward to updating you on our progress on future calls.

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Operator [3]

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