Q3 2019 Earnings Call
Good day and welcome to the capital senior living charge for sure Shootouts 19 earnings release Conference call.
Today's conference is being recorded.
All statements today, which are not historical facts may be deemed to be forward looking statements within the meaning of the federal securities laws.
These statements are made as of today's date on the company expressly disclaims any obligation to update these statements in the future.
Actual results performance may differ materially from those forward looking statements.
Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued today as well as in the reports the company files with do you see from time to time infusion to risk factors contained in <unk> annual report on form 10.
Hi, I'm quarterly reports on Form 10-Q .
Please see todays press release for the Safe Harbor statement, which may be found.
So senior Dot com forward Slash Investor Dosh Relations I'm was furnished in an 8-K filing this morning.
Also please note that during this call onto company present, non-GAAP financial measures for reconciliations of each non-GAAP measure from the most comparable GAAP measure piece also see today's press release.
This time I would like to turn the call over to capture show senior Livings, President and CEO Ms. Kim.
Please go ahead Mike.
Thank you and good morning to our shareholders analysts employees in other participants welcome to capital Senior living conference call to discuss our third quarter 2019 results. Joining me for today's call is Carey Hendrickson, our Chief Financial Officer, and Brandon Rebar, Our Chief operating officer, who join capital senior living about.
Weeks ago.
And it has an extensive background and impressive track record in financing operations in the senior housing and skilled nursing sectors. He is already large many hours with their operational teams and its visited more than 20 of our communities. These have been in depth visits to work with the community teams and learn more about the unique opportunities in each of our markets.
We are delighted to have Brandon onboard and look forward to its operational leadership in further executing our turnaround strategy well Brandon will not have prepared remarks on today's call. He will be available for your questions. During the Q in a period.
2019 of the transformative year for capital senior living as our top priority is to rebuild the foundational practices and disciplined necessary to strengthen our day to day business. We are now about nine months into our strategy is stabilizing bass nurture and grow to improve the operating performance and financial foundation of the company.
Yes, the patients we set for 2019 were built with a deliberate focus on restoring the discipline required to grow occupancy stabilize rate manage operating expenses and improved performance in the coming periods.
We mentioned during our second quarter earnings call that we expected Q3 results to be lower as we continued the actions necessary to reverse a declining occupancy trends that began nearly two years ago.
While the results reported today reflect decisions we've made to improve our long term success. We firmly believe Q3 was the low point of our turn around and we are now exiting got trough.
Total move ins for Q3, while developing in the latter moms of the quarter were up 7% sequentially over Q2 growing for the first time since the second quarter of 2018.
Additionally rates and concessions remain well managed indicating that to changes in our incentive plans in sales activities are providing our teams with the tools and focus to successfully sell the value of our communities products and services.
Our move outs are also trending lower improving 9% sequentially, 13% year over year for the third quarter and 12% year to date through September we have now posted positive net move ins for August September and October , which will provide sequential financial occupancy improvement in Q4.
Let's focus on a specific actions we've taken to improve performance.
During the first and second quarters of 2019, our focus centered on setting expectations for internal transparency accountability and performance.
We restructured and refreshed our field sales and operations teams and establish the foundational sales marketing and operational platforms to fuel long term girls.
Elevated accountability for sales directors to focus them on a full revenue picture on the value of our products and services and on working with their community teams to reduce preventable move outs. This focus has delivered the reason positive changes in physical occupancy and will be evident in our fourth quarter results.
Optimization of our business systems is working we significantly improved our community level and consolidated analytics and insights as key business metrics by implementing a new forecasting model back in may of this year.
Utilization of this model has allowed us to forecast our business performance with nearly 100% accuracy during each of the last six months.
This is the dramatic improvement to community level, and consolidated forecast accuracy and reliability.
During the latter part of the second quarter and throughout the third quarter, we put laser focused on enhancing the quality and competitiveness of our product and services by investing in our community aesthetics are people in our programs to more favorably positioned ourselves in each of our market.
We ramped up our sales and marketing program to provide incremental leads in more robust sales processes to our organization.
I mentioned during our second quarter results call that we were in the process of overhauling, our marketing activities and I'm pleased to note that these changes have resulted in consolidated lead growth of 9% sequentially and 5% compared to the third quarter of last year.
The new volume growth in both internally generated leads and builds from Aggregators.
In addition, during Q3, we implemented and tested and new sales process in 12 of our communities.
This program involve new processes to improve our lead response times and guide perspective residents and their families through the sometimes confusing and often emotional process choosing a senior living community for themselves or loved ones.
The program ran 12 weeks from mid July through the end of October with minimal incremental cost and demonstrated very promising results.
Hearing same community performance of the test period to the comparable 12 week period in the prior year total leads increased more than 12%. Our response times improved more than 10 fold and move into these communities increased 21.2% over the same period last year. Clearly these are strong results from the program.
And we are actively expanding it across the remainder of our portfolio.
With regards to our highly valued employees. In addition to modernizing our health and wellness benefits or P.T. O program and other employee park, we invested approximately $576000. During Q2 in Q3 to increase hourly wages.
In certain markets, where the competition for talent is particularly intense while we also worked to eliminate utilization of higher cost agency staffing.
Similar to the industry agencies staffing has been quite expensive for us this year totaling $5.1 million year to date compared to 2.2 million in 2018, the investment in our team are beginning to pay off expenses for agency staffing decreased $332000 sequentially from Q2 Q3.
Due to the wage adjustments and successful execution of initiatives to invest in our direct employees and reduce agencies dabbing.
We're working hard to reduce agency staffing to very minimal levels across the portfolio by the end of 2019, providing a margin expansion opportunity going forward.
Additionally in August we were selected to participate in a $12 million apprenticeship ran through the Dallas County Community College District from the U.S. Department of Labor. The Grant will promote work based training not only and not only strengthened our local Dallas workforce, but also provide a framework for similar programming and benefit our.
Work force across the country, where are the only senior living company to participate in this grant.
The lead girls moving girls sales process improvements reductions in agency staffing expenses and investments in our people product in programs demonstrate the operational improvement that is taking hold and should deliver future benefits.
Now, let's turn to another one of our top priority is improving our financial foundation.
October we divested you aging noncore assets, which no longer fit our portfolio and we're at a point of needing significant near term capital expenditures.
These asset sales generated nearly $15 million of cash proceeds.
While reducing our outstanding debt by $44.4 million.
We also finalized in agreement with HCP now help peak to accelerate the transition a benign communities under the Triple net lease expiring in October 2020.
Four communities will transition to other operators in January and the remaining five communities will be marketed for sale. The transition of these communities will eliminate the burden of $13.8 million in annualized cash leasing spreads and improves the of that though by approximately $3.1 million on an annualized basis Kerry will provide.
An additional details on these transactions.
I will close by saying that we firmly believe our plan is taking hold and that our third quarter results represent the trough period of our turnaround we expect our fourth quarter results to show improvement over Q3, as our strategy continues to take hold and accelerate operational momentum.
Now I'll turn the call over to carry to provided detailed update on our Q3 financial results I'll join the I'll rejoin the call shortly to provide a few closing remarks before opening the lines for questions.
Thank you Kim in my remarks, I'll discuss our non-GAAP measures, which exclude two communities that are undergoing lease up after significant renovation conversion, which is consistent with our prior quarters in 2019 or non-GAAP measures include the to Houston community is impacted by Hurricane Harvey Harvard The statistical measures that we include the press release exclude the results of these two.
Communities since there and lease up into include them would make the statistical measures less meaningful.
One of information we will include all communities starting in the first quarter of 2020.
The first nine months of this year, we've made purposeful investments and our people and our product knowing that these investments would cause some level of disruption and impact our financial results in 2019.
That's what's been made with an eye of the future to building a platform for growth in our future financial performance and creating the foundation for long term value creation. For example, knowing that leadership in our communities is most important element for success, we've made necessary changes and the most critical leadership positions at our communities, our executive directors and sales directors.
We've revised incentive plans to make sure that our executive directors on or sell directors are properly motivated increased revenue in a while.
We've made important capital investments to refresh high impact areas within certain communities Weve increased spending on repairs and maintenance to make sure. The critical systems that are communities are working well for residents and that our communities present, well at all times.
We've made market wage adjustments in certain markets and improved our benefit programs to attract to retain talent. We've increased the number of regional operations managers to create greater support for our communities Weve added sales excellence managers to create greater support for ourselves directors.
Purposely increased travel costs, what our regional managers and B piece of operations could be present more frequently in our communities to drive change and improvements.
Best month, and others like them.
Occupancy revenue and expense in the short term, but we're beginning to see that's investments, possibly impact financial physical occupancy growth as Ken noted, we expect other measures of our financial performance to soon balls seat.
And our released this morning, we reported total consolidated revenue of $111.1 million for the third quarter 2019, a decrease of $4.5 billion or 3.9% over the third quarter 2018.
The decrease is primarily related to lower financial occupancy year over year as well as an 800000 dollar decrease related to celebrate Kokomo, Indiana community on May one.
Declines related to these items are partially offset by $700000 incremental revenue in the third quarter 2019 from the company's two communities impacted by Hurricane Harvey, which came back online in July of 2018.
Our operating expenses increased $4.2 million or 5.5% $80.4 million in the third quarter 2019, as compared to third quarter 2018, mostly due to business interruption credits at Archie Hurricane commit hurricane impact communities that are $1.2 billion less than the third quarter 2018.
A 1 million dollar increase in insurance expense that we had related claims incurred during the year and then at 800000 dollar adjustment as Kim mentioned, we bought a modernize our P.T. O policy, and we had increase or Pts accruals related to that.
We also made investments and repairs and maintenance increasing these caused by $350000 in the third quarter, 35% increase over the third quarter last year.
Our business interruption reimbursements for to Hurricane impacted communities ended in July 2019.
The B. I credit <unk> third quarter, 2019 was $100000 as compared to $1.3 million and the third quarter 2018.
Both of those communities are making steady progress and occupancy.
General and administrative expenses for the third quarter 2019 were $7.6 million compared to $5.6 million the third quarter 2019.
Third quarter 2019 included approximately $700000 and separation and placement costs, mostly related to the changes that have been made in our CEO and C O positions.
Excluding these and other transaction costs from both years RG <unk> expense increased approximately $1.6 million in the third quarter 2019, as compared to the third quarter 2018.
Mostly related to higher health claims expense increased travel cost as I mentioned earlier, especially with having a regional managers and b piece of operations onsite more frequently in our communities differences and bonus accruals between the two periods.
<unk> expense as a percentage of revenue under management was 5.6% third quarter 2019.
As a result of the changes in revenue operating expense and gene I discussed adjusted EBITDAR was $27.3 million in the third quarter 2019, compared to $36.1 million in the third quarter 2018, and our adjusted CFO was negative $1.2 million third quarter 2019.
$8.1 million in the third quarter 2018.
Also see if AFFO for the third quarter 2019 included in negative impact to see if AFFO of approximately $500000 related to the adoption of the news lease accounting standard effective January one 2019, which has been in the case in each of the quarters. This year in 2019.
Looking at our same community results, our same community revenues decreased 3.8% as compared to the third quarter 2018.
We had a modest increase in average monthly rent of 0.2% as compared to third quarter last year, and our same community occupancy declined 340 basis points, 82.3%.
Slide was 130 basis points on sequential basis for the second quarter 2019.
For same community expenses in the third quarter, 2019 increased 2.4% or employee labor cost increased only 0.2% in the third quarter 2019 due in large parts of the rightsizing of our workforce across our field operations that was completed.
This year.
We did see an increase our contract labor cost as compared to the third quarter 2018, increasing about $900000.
Including contract Labor, our labor expense increased 1.9% in the third quarter 2019 over the third quarter the prior year.
As Tim noted, we've made a wage adjustments at a number of our communities that up the most significant wage pressure, which is helping us to better track caregivers in these markets and as a result, we saw a contract labor come down about $300000 for the second quarter to the third quarter.
Our food cost increased 1.1, excuse me decreased 1.1% of the third quarter at our other large cross category utilities also decreased 0.1% over the third quarter of last year.
Revenue related to lower occupancy increase in contract labor was simultaneous wage adjustments were the primary drivers of a 15.1% decrease in our same community net operating income in the third quarter of 2019 as compared to the third quarter of 2018.
As noted in our press release and as Kim mentioned, we also closed on two transactions in October the sell it to non poor communities at an accretive early termination of nine communities lease from HCP now healthy.
These transactions work together to optimize for our portfolio strengthen our financial foundation and improve our financial position.
We closed on the sale of the two noncore communities in Springfield, Missouri, Peoria, Illinois on October one at a price of $64.8 million, which resulted in $14.8 million and net cash proceeds.
Ladies had combined CFO of two and a half million dollars in the first nine months of 2019.
We did significant near term capital expenditures and we eliminated $44.4 million of debt facilities communities.
On October 22nd we entered into an agreement for the early termination of nine underperforming leased communities that were part of a triple net master leases scheduled to mature in October 2020.
For the communities will transition to new operators on or around January 15, 2020, and the other part communities are being marketed for sale with expected closing dates and the first half of 2020, most likely in mid to late second quarter.
These non communities currently have $13.8 million annual cash lease expense, which will be eliminated as each community has transitioned are sold and we expect annual seasonal improvement of approximately $3.1 million related the elimination of the nine communities.
Well pay an early termination fee of $1 million day CP in the first quarter 2020, and we'll have one remaining six property master lease with HCP that matures in 2026, which is unaffected by this transaction.
The normal course of business, we continue to be engaged in various similar activities to strengthen our financial foundation and optimize our portfolio, including considering the divestiture of a limited number of additional assets and the refinancing of certain existing owned assets.
Looking briefly the balance sheet, we ended the quarter was $20.8 million of cash and cash equivalents, including restricted cash.
During the third quarter, we spent $6.5 billion on capital expenditures as we continue to invest in their products for future growth.
At October 30, 31, our cash balance including restricted cash.
Proximately $33 million with the increase primarily attributable to the sale of the two noncore communities all that number one.
Our mortgage debt balance at September 32019 was $967.4 million at a weighted average interest rate of 4.8%.
At September 30, the majority of our debt was it fixed interest rates, except for to bridge loans at totaled approximately $76 million.
$50 million of long term variable rate debt during master credit facility.
The two bridge loans, we have 65 million dollar bridged tours in July 2020, kind of 11 million dollar bridge loan that matures in October 2021.
We're in active discussions with lenders regarding both bridge loans that are considering options related to extensions indoor refinancings for assets that are part of the current bridge loans.
Tim noted in Europe in her remarks, we're experiencing positive momentum and net move ins with consecutive month increases in physical occupancy in August September and October .
Expect these physical occupancy increases to translate into sequential same store growth in financial occupancy in the fourth quarter as compared to the third quarter.
While our CFO will not include approximately $750000 related to the sale of the two noncore communities. We expect our fourth quarter results to show improvement from the third quarter due to higher same store occupancy lower utilities expense due to seasonality and as Ken noted, we're committed to significantly reducing our contract labor cost.
Well the environment remains challenging our focus is fully on stabilizing and investing in our operations. We've done a lot of the difficult work in the first nine months of this year and we will continue to be persistent and taking the actions necessary to drive stronger results going forward. We're working diligently to build a company that will have a consistent high quality product across its.
Portfolio, which were confident will lead to financial results and a strong reliable and predictable.
We're operating with a tremendous sense of urgency expect the momentum building in our operations to continue into the fourth quarter now I'll turn it back over to Kim.
Thanks Kerry.
Reestablishing the fundamentals of our business will be an ongoing process as we execute on the key elements of our transformational strategy and stabilize invest nurture and grow to drive long term value for all of our stakeholders for the past several months, we've been operating with laser focused precision and urgency on five key areas of stabilization.
One improving the quality of our product and services by investing in our people in our communities to establishing robust systems and analytics to provide real time insights to the business and achieve sustainable forecast accuracy.
Three enhancing in upgrading our operational leadership for implementing programs and tools to attract retain and develop high quality talent and five utilizing our unique scale and best practices to drive sustainable long term operational efficiencies. It will take time to fully realize these improvements across.
The enterprise, but we firmly believe and the strength and execution of our plan. Our actions are beginning to deliver the impact we want and that will be evident in future period results I will now open the lines for questions.
Thank you if you would like to ask a question P. seek no by pressing star one on your telephone keypad, if you're using a speaker phone piece make sure. Your mute function is trying to talk to allow you to reach our equipment again, that's star I want to ask a question.
<unk> for just a moment to allow everyone an opportunity to seek know for questions.
Well now take our first question from Chad Vanacore, saying. Please go ahead. Your line is open.
Hey, good morning.
Yeah.
Alright, so I'm thinking about occupancy normally there is a seasonal lift in threeq you. There's some sequential declines, but you know you had warned us that won't be happy that would happen [laughter] now on thinking about.
How much of that occupancy you get back in the fourth quarter, So where does occupancy stand today and it is it continuing a trend of moving up from Threeq to those.
Chad This is carry it is and it increased.
A bit in October about 20 to 30 basis points is what we anticipate that will happen in October versus September .
So and we as we noted we've had increases in August September and October . So the the August increase was less than the September increase and the September October increases were both.
Meaningful increases and so we saw some lift in this in September and more lift in October and we would expect again another lift in November in our occupancy.
Okay, and I should say November obviously, it's very early in November but it is trending similar to how October in September trended in the first part of them up.
Okay. That's good color.
[noise] just thinking about margins they were weak in Threeq you.
Should we be thinking about any nonrecurring costs that we could consider that might normalize going forward anything related to your cost savings initiatives.
Well, we've had and if you look at our cost we I think for the most part there there's not much in the on the operating expense side. There is some some nonrecurring if you will cost in our DNA, but not really from an operating standpoint. So.
Most of those cost or are.
Pretty fixed and set going forward now with what we are doing a lot to try to manage those contract labor costs as we met as we noted which will in call. It will result in improvements in our margin.
Chad I'll just jump in here from an operating perspective, you know we are very focused on.
Decreasing contract labor too and it's a very minimal point by the end of this here. So we expect to continue to see improvements in that over the fourth quarter.
And we've already made the wage in Jasmine adjustments and investment in our direct labor that we think will allow us to deliver those reductions in the contract labor.
All right just staying with labor for a second and how are your full time employee turnover traffic.
You know turnover.
Bite early in the year as you might imagine as we've mentioned we've made quite a lot of changes in the operational and sales team. So we didnt have a spike in turnover back in the March April time period, but it has been steadily declining since that period and we're very happy.
Be with our employee turnover and retention here in the last three months. So we feel like where we are a in a period of stabilization of our employee base and we actually expect that we'll continue to get even better.
Alright, and then since you, though welcome Brennan aboard brand and welcome aboard.
You're actually available for questions they put a target audience.
You've been 20 [laughter].
What are the <unk> what are some of the common low hanging fruit that you're seeing across those communities. So where can you actually improved performance.
Well I think as Kim mentioned, so much it what's been done earlier in the year is beginning to have an impact to the positive. So I think for our team really focusing on continued practices around community outreach and lead generation and then also the speed to respond.
Those are areas that we've seen recent success.
I mentioned and so continuing to focus on those is really important.
And then I would also say just on the labor side of the world. The investments that have been made and increasing wages in specific markets ensuring that those are returning on a very near term basis to stabilize our workforce and to realize those as Kim mentioned those continued declines in the contract labor utilization.
What do you want to do to kick that lead generation increase and convert those to move it.
So I'd say, we're already seeing it as you know Kim and carrier both mentioned in terms of the month over month.
Been increases.
So.
With the increased community outreach and seeing additional lead generation through both kind of internal and external sources.
Then just sticking with the practices that are some of the newer executive directors and sales directors had been implementing.
No we will continue to see.
Expect to be ongoing improvement in those areas.
Ted I'll just add that we saw really great result, with the pilot program that we did over that 12 week period in those 12 communities.
And you know that was.
A lot about blocking and tackling and light brand in mentioned speed to responses to respond and making sure that our responses really nurture those leads through the process and result in move ins, which we saw significant lift in those 12 communities. So one of our main priority.
Here in the fourth quarter and the coming months is to ensure that we anchor those seem principles from that pilot in the rest of our portfolio. So they can see the same.
Types of benefits.
All right I'll leave it there thanks a lot.
All right. Thank you.
Thank you well now take our next question.
Front giant <unk> Gosh, you from Bank of America. Please go ahead.
Thank you this morning, so and so for the color around the occupancy improvements in the last three months and I guess into November .
So on that front can you talk about pricing because if you're a friend increase just do you anticipate for in place rents sedans and.
Any color on you know the velocity discounting that you've seen.
During this quarter or do you plan into a Q4.
Yes.
Yeah, I'm I'll jump in first and then I carry can can add some color as well. So you know Joanna we have we've been sort of fighting the.
Occupancy decline here over the course of the year and.
Generally speaking those residents as they are moving out and they have a higher rate associated with them because they're at a higher acuity level and need more levels of care. So the move in the folks that are coming in are coming in a with less acuity and less of those I care needs.
So the rate is is lower on the move inside now we have implemented a about a 3% in place rate increase throughout the year, but when you take the combination of all of those things together.
The net is that rates have been flat, which we're really pleased with we feel good that our level of discounting is appropriate and well managed our teams are selling the value of our communities and the services, we provide versus engaging in you know sort of a price battle in the market place.
Because that's not constructive and certainly not helpful for the long term.
We feel good about that and then on the concession side of things. Those are also very well managed we've mentioned a couple of times before our sales teams have a tool box that they are able to utilize that.
Sort of but some guardrails that on a those concessions.
But allows them to flexibility that they need a lot to encourage at move ins in occupancy you know a with the prospects that they're working with.
So would you say that next year, you would expect all in.
Fate, so all growing.
Yeah, I mean, we we you know we plan to Ah have similar in place rent increases one thing to note is that you know ours incur occur on a rolling basis.
So that doesn't all occur on January one so it they rent in place rent increases occur as the leases.
You know.
And then roll off and then renew.
We would expect to have a similar you know three ish percent rent increase but of course it is very much depends on the market conditions.
Hi Inn in which each of our communities operate you know where we have occupancy challenges. We we probably will has lesser increases and where we are operating in a really stabilized fashion and have I occupancy.
It will probably take a bit higher.
Increases.
It will talk more about 2020 on our next caller fourth quarter earnings call, but I think.
Kim's point about the move outs, having really higher rates and the move ins because of the level of care fees that are associated with those move out if we continue to decrease the move outs, that's gonna help lift or rates in 2020 as well. So we'll provide more color on that as we get into the fourth quarter conference call but.
For the discussing 2020 then.
[laughter] right and then just still a to stay on that topic of stuff can just mentioned something about Oh you know.
Different I guess, Oh rents I guess polishes or procedures St. Depending on the under on the on that asset. So last quarter, you couldn't give us some stuff to route Oh, you know the mix in your portfolio of dose assets, what a box, 85% oxys seem to be low so I didn't know what their I missed that or can you provide.
Similar kind of stopped all you know I go after quarter.
Yeah, we didn't provide that information this time, Joanna, but I, but I can look look that up and get that to you certainly after after the call.
Okay, that's helpful and and the last questions from me would be in terms of Capex. You know your plans like is going forward in terms of saw a you know what do you what do you budgeting for for the upcoming quarter and going forward.
Yes, we've had about $14.3 million in Capex. So far this year I think that we'll probably end up.
Near the.
Probably the 17 18 million dollar range for 2019, and that's going to allow us to continued obviously take cover buildings, but importantly, do some some continued to do some high impact.
Refreshes at certain communities that are not it's not very.
<unk> expenses, but aren't impactful and so we think we'll be able to do a little bit more that in the fourth quarter, but beats somewhere around $18 million I'd say for the for for the full year.
Okay, Great and just a little one quick follow up did I hear right you talk about the revenue contribution off the two assets that you are did you sold a couple of first was 700.
The $750000. It does relate that is how much they're CFO contribution was oh, that's on a quarterly basis.
Yeah.
As a real revenue communities.
Revenue for those two communities on an annual basis was about nine and a half million dollars.
Right.
Alright, Okay. There's 760 years saw currently folks fish.
That's right so about $3 million.
Right right.
Right.
Great I'll go back to that could thanks.
Thank you.
Thank you I now unlike last call backtrack speakers.
Okay, great. Thank you in closing I'd like to thank our shareholders vendors and residents for their support I'd also like to thank our 7000 dedicated employees for all that they do each day to enhance and enrich the lives of our residents you are they centerpiece of our success. This concludes today's conference. Thank you ever.
The one and have a great day.
Ladies and gentlemen, this concludes today's call. Thank you for your practice the patients you may now.