Five Star Quality Care, Inc. (FVE)

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Five Star Quality Care (FVE)

Q3 2012 Earnings Call

October 29, 2012 10:00 a.m. ET


Tim Bonang - VP, IR

Bruce Mackey - President and CEO

Paul Hoagland - Treasurer and CFO

Scott Herzig - COO


Darren Lehrich - Deutsche Bank

Daniel Bernstein - Stifel Nicolaus

Mike Petusky – Noble Financial



Ladies and gentlemen, good day and welcome to the Five Star Quality Care third quarter 2012 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead sir.

Tim Bonang

Thank you operator, and good morning everyone. Joining me on today’s call are Bruce Mackey, Five Star’s president and CEO; and Paul Hoagland, Five Star’s treasurer and CFO; and Five Star’s new chief operating officer, Scott Herzig.

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, 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 other securities laws. These forward-looking statements are based on Five Star’s present beliefs and expectations as of today, October 29, 2012.

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 filings with the Securities and Exchange Commission 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.

Before I turn the call over to Bruce, I want to take a moment to explain some of the changes we made to the supplemental information contained in our press release. The first major change was based on feedback we received from investors and analysts who asked for more transparency around our core private pay independent and assisted living business. Within our senior living segment, we broke out three distinct areas, which include private pay, independent, and assisted living communities; continuing care retirement communities or CCRCs; and standalone nursing.

The second change we made this quarter was the addition of operating trends for our managed communities. Since 2011, we have begun to manage communities in addition to leasing and owning communities. We consider this a growing and important part of our business, and understand that it is necessary to provide investors with information to evaluate it. We hope that both of these changes help investors and analysts better understand our business.

And now, I would like to turn the call over to Bruce.

Bruce Mackey

Great. Thank you Tim, and thank you all for joining us on our 2012 third quarter earnings call. As Tim just mentioned, we did make some changes to our supplementary reporting that we think are helpful for the investment community to better evaluate and focus on our strong and growing core private pay business. We would be happy to answer any questions you may have about these changes during the question and answer session of this call.

The third quarter of 2012 marked Five Star’s 15th consecutive quarter of profitability with income from continuing operations of $0.07 per share. Income from continuing operations for the third quarter of 2012 included a tax adjustment of approximately $825,000, which benefited the third quarter provision for income taxes.

In addition, there was an expense for $350,000 attributable to a past-period billing adjustment. Taking into account these two items, income from continuing operations was $0.06 per share.

It is important to note that EBITDARM, adjusted for nonrecurring items, was up an impressive 22% from last year at $11.8 million. And, this was in spite of the 11% Medicare cuts enacted last October. We have clearly proved our ability to offset this loss in revenues while continuing to grow our private pay senior living business and remain profitable.

Moving on, in August we made an announcement that Scott Herzig, formerly a Five Star divisional vice president of our western division, was appointed chief operating officer effective September 4.

We are excited to have Scott on board as our new chief operating officer. He has significant experience in the industry, and because he’s been with Five Star for over 10 years, he knows our people, our systems, and our residents. Scott is well-equipped to help us maintain and grow occupancy.

On a high level, the third quarter was highlighted by a number of transactions, including the sale of the pharmacy business, the addition of substantially more private pay senior living communities, and the agreement to sell to skilled nursing facilities. That, in total, further improved our product mix and lessened our reliance on government funding. We now derive 75% of our accumulated revenues from residents’ private resources and 92% of our total company revenues now come from senior living.

In September, we completed the sale of our institutional pharmacy business to Omnicare for gross proceeds of $37.8 million and recognized a gain on the sale of $23.3 million. The proceeds we used to repay the outstanding balance on our $150 million revolving credit facility. The Five Star management team worked diligently over the last year to finalize and close on this transaction.

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