Five Star Quality Care, Inc. Announces Third Quarter 2016 Results

NEWTON, Mass.–(BUSINESS WIRE)–Five Star Quality Care, Inc. (Nasdaq: FVE) today announced its financial
results for the quarter and nine months ended September 30, 2016.

Financial Results for the quarter ended September 30,
2016:

  • Senior living revenue for the third quarter of 2016 decreased 0.8% to
    $277.4 million from $279.7 million for the same period in 2015. The
    decline in senior living revenue is a result of decreases in
    occupancy, partially offset by an increase in average monthly rates to
    residents who pay privately for services. Management fee revenue for
    the third quarter of 2016 increased 22.8% to $3.3 million from $2.7
    million for the same period in 2015. Growth in management fees was
    primarily due to the previously disclosed modifications to Five Star’s
    management and pooling arrangements with Senior Housing Properties
    Trust, or SNH, which took effect on July 1, 2016, an increase in the
    number of managed communities compared to the 2015 period and an
    increase in average monthly rates to private pay residents at
    comparable managed communities, partially offset by a decrease in
    occupancy at comparable managed communities.
  • Loss from continuing operations for the third quarter of 2016 was $5.8
    million, or $0.12 per diluted share, compared to loss from continuing
    operations of $26.3 million, or $0.54 per diluted share, for the same
    period in 2015. Loss from continuing operations for the third quarter
    of 2016 included benefits from income taxes of $0.9 million, or $0.02
    per diluted share, related to a reduction of previously accrued
    estimated state tax expense resulting primarily from the previously
    disclosed June 2016 sale and leaseback transaction with SNH. Loss from
    continuing operations for the third quarter of 2015 included a
    non-cash charge for goodwill impairment of $25.3 million, or $0.52 per
    diluted share, and compliance costs and professional fees of $0.9
    million, or $0.02 per diluted share, resulting primarily from the
    previously disclosed Medicare compliance assessment at one of Five
    Star’s skilled nursing facilities, or the Compliance Assessment.
  • Net loss for the third quarter of 2016 was $5.9 million, or $0.12 per
    diluted share, compared to net loss of $27.5 million, or $0.57 per
    diluted share, for the same period in 2015.
  • Earnings from continuing operations before interest, taxes,
    depreciation and amortization, or EBITDA, for the third quarter of
    2016 was $3.3 million compared to $(17.2) million for the same period
    in 2015. EBITDA, excluding certain items noted in the supplemental
    information provided below, or Adjusted EBITDA, was $4.3 million and
    $9.2 million for the third quarters of 2016 and 2015, respectively.
    Adjusted EBITDA excluding rent, or Adjusted EBITDAR, was $54.9 million
    and $59.0 million for the third quarters of 2016 and 2015,
    respectively. A reconciliation of loss from continuing operations
    determined in accordance with U.S. generally accepted accounting
    principles, or GAAP, to EBITDA, Adjusted EBITDA and Adjusted EBITDAR
    for the quarters ended September 30, 2016 and 2015 appears later in
    this press release.

Operating Results for the quarter ended September 30,
2016 (continuing operations):

  • Occupancy at owned and leased senior living communities for the third
    quarter of 2016 was 83.8%. For the quarter ended September 30, 2016,
    the calculation of occupancy includes only living units categorized as
    in service; occupancy calculations for periods prior to 2016 included
    certain living units categorized as out of service.
  • The average monthly rate at owned and leased senior living communities
    for the third quarter of 2016 increased 0.9% to $4,608 from $4,567 for
    the same period in 2015.
  • The percentage of revenue derived from residents’ private resources at
    owned and leased senior living communities for the third quarter of
    2016 increased 60 basis points to 78.6% from 78.0% for the same period
    in 2015.

Year to Date Financial Results:

  • Senior living revenue for the nine months ended September 30, 2016
    increased 0.4% to $836.5 million from $832.8 million for the same
    period in 2015. Growth in senior living revenue was the result of
    increases in average monthly rates to residents who pay privately for
    services, a $1.0 million reversal in revenue reserves recorded in 2016
    as a result of the final settlement amount with the United States
    Department of Health and Human Services Office of the Inspector
    General for the Compliance Assessment being less than the previously
    estimated amount, and a revenue reserve recorded in 2015 of $2.4
    million related to the Compliance Assessment, partially offset by a
    decrease in occupancy at comparable senior living communities.
    Management fee revenue for the nine months ended September 30, 2016
    increased by 12.8% to $9.0 million from $7.9 million for the same
    period in 2015. Growth in management fees was primarily due to the
    previously disclosed modifications to Five Star’s management and
    pooling arrangements with SNH which took effect on July 1, 2016, an
    increase in the number of managed communities compared to the 2015
    period and an increase in average monthly rates to private pay
    residents at comparable managed communities, partially offset by a
    decrease in occupancy at comparable managed communities.
  • Loss from continuing operations for the nine months ended September
    30, 2016 was $16.1 million, or $0.33 per diluted share, compared to
    loss from continuing operations of $34.4 million, or $0.71 per diluted
    share, for the same period in 2015. Loss from continuing operations
    for the nine months ended September 30, 2016 included a $1.5 million,
    or $0.03 per diluted share, reversal in revenue reserves and accrued
    liability for estimated penalties related to the Compliance Assessment
    and a provision for income taxes of $2.8 million, or $0.06 per diluted
    share, resulting primarily from state tax expense related to the June
    2016 sale and leaseback transaction with SNH. Five Star did not
    recognize any federal tax expense for the 2016 period because its
    federal taxable income and expense were offset by its federal net
    operating loss carry forwards and tax credit carry forwards. Loss from
    continuing operations for the nine months ended September 30, 2015
    included a non-cash charge for goodwill impairment of $25.3 million,
    or $0.52 per diluted share, a revenue reserve of $2.4 million, or
    $0.05 per diluted share, and penalties, compliance costs and
    professional fees of $5.3 million, or $0.11 per diluted share,
    resulting primarily from the Compliance Assessment, partially offset
    by a gain on early extinguishment of debt of $0.7 million, or $0.01
    per diluted share.
  • Net loss for the nine months ended September 30, 2016 was $16.2
    million, or $0.33 per diluted share, compared to net loss of $36.7
    million, or $0.76 per diluted share, for the same period in 2015.
  • EBITDA for the nine months ended September 30, 2016 was $18.8 million
    compared to $(6.6) million for the same period in 2015. Adjusted
    EBITDA was $19.3 million and $26.0 million for the nine months ended
    September 30, 2016 and 2015, respectively. Adjusted EBITDAR was $170.1
    million and $175.0 million for the nine months ended September 30,
    2016 and 2015, respectively. A reconciliation of loss from continuing
    operations determined in accordance with GAAP to EBITDA, Adjusted
    EBITDA and Adjusted EBITDAR for the nine months ended September 30,
    2016 and 2015 appears later in this press release.

Acquisition and Disposition Activities:

In July 2016, Five Star began managing a senior living community SNH
owns located in Alabama with 163 living units.

In September 2016, Five Star sold a community it owned with 32 living
units that was reported as held for sale and included in discontinued
operations in Five Star’s financial statements, for a sales price of
$0.2 million, excluding closing costs. As of September 30, 2016, Five
Star has no senior living communities reported as held for sale.

In September 2016, Five Star and SNH sold a vacant skilled nursing
facility located in Wisconsin for approximately $0.2 million, and as a
result of this sale, Five Star’s annual rent payable to SNH decreased by
approximately $25,000 in accordance with the terms of the applicable
lease.

In September 2016, SNH entered into an agreement to acquire two senior
living communities with a combined 126 living units located in Illinois
for $18.6 million. If these acquisitions are completed, Five Star
expects to lease these communities from SNH under one of Five Star’s
existing master leases with SNH.

In October 2016, Five Star entered into an agreement to acquire an
assisted living community with 63 living units located in Illinois for
$7.9 million. Five Star currently expects this acquisition to close by
year end 2016 and to fund this acquisition with cash on hand.

In October 2016, Five Star agreed to manage four senior living
communities SNH owns with approximately 350 living units. Five Star will
manage these senior living communities pursuant to management agreements
that will be added to an existing or new pooling agreement with terms
consistent with the agreements that became effective from and after May
2015 as previously disclosed.

Conference Call:

On November 3, 2016, at 10:00 a.m. Eastern Time, Five Star will host a
conference call to discuss its third quarter 2016 results. Following
management’s presentation, there will be a question and answer period.

The conference call telephone number is (877) 329-4332. Participants
calling from outside the United States and Canada should dial (412)
317-5436. No pass code is necessary to access the call from either
number. Participants should dial in about 15 minutes prior to the
scheduled start of the call. A replay of the conference call will be
available through 11:59 p.m. Eastern Time on Thursday, November 10,
2016. To hear the replay, dial (412) 317-0088. The replay pass code is
10093012.

A live audio webcast of the conference call will also be available in a
listen only mode on Five Star’s website at www.fivestarseniorliving.com.
Participants wanting to access the webcast should visit Five Star’s
website about five minutes before the call. The archived webcast will be
available for replay on Five Star’s website for about one week after the
call. The transcription, recording and retransmission in any way of
Five Star’s third quarter 2016 conference call
are strictly prohibited without the prior written consent of
Five Star. Five Star’s website is not incorporated as part of
this press release.

About Five Star Quality Care, Inc.:

Five Star Quality Care, Inc. is a senior living and healthcare services
company. As of September 30, 2016, Five Star operated 276 senior living
communities with 31,349 living units located in 32 states, including 213
communities (22,947 living units) that it owned or leased and 63
communities (8,402 living units) that it managed. These communities
include independent living, assisted living, continuing care retirement
communities and skilled nursing communities. Five Star is headquartered
in Newton, Massachusetts.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS PRESS RELEASE CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER FIVE STAR
USES WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”,
“ESTIMATE”, “WILL”, “MAY” AND NEGATIVES OR DERIVATIVES OF THESE OR
SIMILAR EXPRESSIONS, FIVE STAR IS MAKING FORWARD LOOKING STATEMENTS.
THESE FORWARD LOOKING STATEMENTS ARE BASED UPON FIVE STAR’S PRESENT
INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT
GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY FIVE STAR’S FORWARD
LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FOR EXAMPLE:

  • SNH HAS ENTERED INTO AN AGREEMENT TO ACQUIRE TWO SENIOR LIVING
    COMMUNITIES IN ILLINOIS. IF THESE ACQUISITIONS ARE COMPLETED, FIVE
    STAR EXPECTS THAT IT WILL LEASE THESE COMMUNITIES FROM SNH. THIS
    TRANSACTION IS SUBJECT TO CONDITIONS. AS A RESULT, THESE ACQUISITIONS
    AND LEASING ARRANGEMENTS MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS
    MAY CHANGE,
  • FIVE STAR HAS ENTERED INTO AN AGREEMENT TO ACQUIRE A SENIOR LIVING
    COMMUNITY IN ILLINOIS. THIS TRANSACTION IS SUBJECT TO CONDITIONS. AS A
    RESULT, THIS TRANSACTION MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS
    MAY CHANGE, AND
  • FIVE STAR HAS AGREED TO MANAGE FOUR SENIOR LIVING COMMUNITIES SNH
    OWNS. FIVE STAR’S ASSUMPTION OF THE MANAGEMENT OF THESE COMMUNITIES IS
    SUBJECT TO CONDITIONS. AS A RESULT, FIVE STAR’S ASSUMPTION OF THE
    MANAGEMENT OF THESE COMMUNITIES MAY NOT OCCUR OR MAY BE DELAYED.

THE INFORMATION CONTAINED IN FIVE STAR’S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, OR SEC, INCLUDING UNDER “RISK FACTORS” IN FIVE
STAR’S PERIODIC REPORTS, OR INCORPORATED THEREIN, IDENTIFIES OTHER
IMPORTANT FACTORS THAT COULD CAUSE FIVE STAR’S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE STATED IN OR IMPLIED BY FIVE STAR’S FORWARD
LOOKING STATEMENTS. FIVE STAR’S FILINGS WITH THE SEC ARE AVAILABLE ON
THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, FIVE STAR DOES NOT INTEND TO UPDATE OR CHANGE
ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.

       

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016   2015 2016   2015
Revenues:
Senior living revenue $ 277,410 $ 279,685 $ 836,523 $ 832,793
Management fee revenue 3,336 2,717 8,955 7,939
Reimbursed costs incurred on behalf of managed communities 63,965   62,170   186,378   180,082  
Total revenues 344,711   344,572   1,031,856   1,020,814  
Operating expenses:
Senior living wages and benefits 137,190 135,133 408,886 404,737
Other senior living operating expenses 70,890 72,637 212,565 216,107
Costs incurred on behalf of managed communities 63,965 62,170 186,378 180,082
Rent expense 50,625 49,730 150,837 149,015
General and administrative expenses 18,542 16,587 54,218 52,750
Depreciation and amortization expense 9,398 8,419 28,847 24,637
Goodwill impairment 25,344 25,344
Long lived asset impairment 196   145   502   145  
Total operating expenses 350,806   370,165   1,042,233   1,052,817  
 
Operating loss (6,095 ) (25,593 ) (10,377 ) (32,003 )
 
Interest, dividend and other income 237 238 766 701
Interest and other expense (945 ) (1,106 ) (3,957 ) (3,597 )
Gain on early extinguishment of debt 692
Gain on sale of available for sale securities reclassified from
accumulated other comprehensive income
12     247   38  
 
Loss from continuing operations before income taxes and equity in
earnings (losses) of an investee
(6,791 ) (26,461 ) (13,321 ) (34,169 )
Benefit from (provision for) income taxes 934 236 (2,841 ) (348 )
Equity in earnings (losses) of an investee 13   (25 ) 107   70  
Loss from continuing operations (5,844 ) (26,250 ) (16,055 ) (34,447 )
Loss from discontinued operations (53 ) (1,238 ) (131 ) (2,253 )
 
Net loss $ (5,897 ) $ (27,488 ) $ (16,186 ) $ (36,700 )
 
 
Weighted average shares outstanding—basic and diluted 48,846   48,427   48,817   48,397  
 
Basic and diluted loss per share from:
Continuing operations $ (0.12 ) $ (0.54 ) $ (0.33 ) $ (0.71 )
Discontinued operations   (0.03 )   (0.05 )
Net loss per share—basic and diluted $ (0.12 ) $ (0.57 ) $ (0.33 ) $ (0.76 )
 
       

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 
September 30, December 31,
2016 2015

Assets

Current assets:
Cash and cash equivalents $ 43,174 $ 14,672
Accounts receivable, net of allowance 38,040 37,829
Due from related persons 8,961 9,731
Investments in available for sale securities 25,801 26,417
Restricted cash 11,168 3,301
Prepaid expenses and other current assets 20,135 19,138
Assets of discontinued operations 567   981
Total current assets 147,846   112,069
 
Property and equipment, net 352,561 383,858
Restricted cash 1,787 2,821
Restricted investments in available for sale securities 18,511 23,166
Equity investment of an investee and other long term assets 9,971   9,856
Total assets $ 530,676   $ 531,770
 
Liabilities and Shareholders’ Equity
Current liabilities:
Revolving credit facility $ $ 50,000
Other current liabilities 186,909   193,920
Total current liabilities 186,909   243,920
 
Mortgage notes payable 58,978 60,396
Deferred gain on sale and leaseback transaction with Senior Housing
Properties Trust
74,347
Other long term liabilities 40,352 43,002
Shareholders’ equity 170,090   184,452
Total liabilities and shareholders’ equity $ 530,676   $ 531,770
     

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 
Nine Months Ended September 30,
2016   2015
Cash flows from operating activities:
Net loss $ (16,186 ) $ (36,700 )
Adjustments to reconcile net loss to cash (used in) provided by
operating activities:
Depreciation and amortization expense 28,847 24,637
Gain on early extinguishment of debt (742 )
Loss from discontinued operations 131 2,253
Gain on sale of available for sale securities reclassified from
accumulated other comprehensive income
(247 ) (38 )
Loss on disposal of property and equipment 70 98
Goodwill impairment 25,344
Long lived asset impairment 502 145
Equity in earnings of an investee (107 ) (70 )
Stock based compensation 749 948
Provision for losses on receivables 2,598 3,520
Amortization of deferred gain on sale and leaseback transaction with
Senior Housing Properties Trust
(1,688 )
Other noncash (income) expense adjustments, net (375 ) 409
Changes in assets and liabilities:
Accounts receivable (2,809 ) (2,689 )
Prepaid expenses and other assets (2,314 ) (1,962 )
Accounts payable and accrued expenses (22,297 ) 330
Accrued compensation and benefits 8,641 9,917
Due to/from related persons, net 222 1,026
Other current and long term liabilities (2,716 ) 9,278  
Cash (used in) provided by operating activities (6,979 ) 35,704  
 
Cash flows from investing activities:
Increase in restricted cash and investment accounts, net (6,833 ) (417 )
Acquisition of property and equipment (40,825 ) (40,867 )
Purchase of intangible assets (191 )
Purchases of available for sale securities (6,780 ) (10,717 )
Proceeds from sale of property and equipment to Senior Housing
Properties Trust
15,180 16,425
Proceeds from sale and leaseback transaction with Senior Housing
Properties Trust
112,350
Proceeds from sale of available for sale securities 13,508   6,469  
Cash provided by (used in) investing activities 86,600   (29,298 )
 
Cash flows from financing activities:
Proceeds from borrowings on revolving credit facility 25,000 20,000
Repayments of borrowings on revolving credit facility (75,000 ) (20,000 )
Repayments of mortgage notes payable (934 ) (5,732 )
Payment of deferred financing fees (300 ) (300 )
Cash used in financing activities (51,234 ) (6,032 )
 
Cash flows from discontinued operations:
Net cash provided by (used in) operating activities 130 (1,512 )
Net cash used in investing activities (15 ) (24 )
Net cash flows provided by (used in) discontinued operations 115   (1,536 )
 
Change in cash and cash equivalents 28,502 (1,162 )
Cash and cash equivalents at beginning of period 14,672   20,988  
Cash and cash equivalents at end of period $ 43,174   $ 19,826  
 
Supplemental cash flow information:
Cash paid for interest $ 3,920 $ 3,078
Cash paid for income taxes, net $ 2,657 $ 805
 

FIVE STAR QUALITY CARE, INC.
RECONCILIATION OF NON-GAAP FINANCIAL
MEASURES
(in thousands)
(unaudited)

Non-GAAP financial measures are financial measures that are not
determined in accordance with U.S. generally accepted accounting
principles, or GAAP. Five Star considers these Non-GAAP financial
measures to be meaningful supplemental disclosures because it believes
that the presentation of these Non-GAAP financial measures may help
investors to gain a better understanding of changes in Five Star’s
operating results and its ability to pay rent or service debt, make
capital expenditures and expand its business. These Non-GAAP financial
measures also may help investors who wish to make comparisons between
Five Star and other companies on both a GAAP and a non-GAAP basis. In
addition to presenting EBITDA and Adjusted EBITDA, Five Star also
presents the non-GAAP financial measure Adjusted EBITDAR. Five Star
leases a majority of the senior living communities that it operates.
Five Star believes that presenting investors with Adjusted EBITDAR
amounts may help them to compare Five Star’s results with other
companies that may own their properties and finance that ownership with
debt financing or to consider how Five Star’s results might compare if
Five Star owned its leased senior living communities and financed that
ownership with debt. The interest expense related to debt financings
would be added when calculating EBITDA; Five Star believes that
presenting Adjusted EBITDAR may help investors better understand the
form, extent and implications of Five Star’s form of leverage for the
senior living communities it leases. The Non-GAAP financial measures
presented are used by management to evaluate Five Star’s financial
performance and for comparing Five Star’s performance over time and to
the performance of its competitors. This supplemental information should
not be considered as an alternative to income (loss) from continuing
operations or net income (loss), as an indicator of Five Star’s
operating performance or as a measure of Five Star’s liquidity. Non-GAAP
financial measures as presented by Five Star may not be comparable to
amounts calculated by other companies.

Five Star believes that income from continuing operations is the most
directly comparable financial measure determined according to GAAP to
Five Star’s presentation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR
from continuing operations. The following table presents the
reconciliation of these Non-GAAP financial measures to loss from
continuing operations, the most directly comparable financial measure
under GAAP reported in Five Star’s condensed consolidated financial
statements, for the three and nine months ended September 30, 2016 and
2015.

         

For the three months

For the nine months

ended September 30,

ended September 30,

2016       2015 2016     2015
Loss from continuing operations $ (5,844 ) $ (26,250 ) $ (16,055 ) $ (34,447 )
Add: interest expense 945 1,106 3,957 3,597
Add: (benefit from) provision for income taxes (934 ) (236 ) 2,841 348
Add: depreciation and amortization expense 9,398 8,419 28,847 24,637
Less: interest and dividend income (237 ) (238 ) (766 ) (701 )
EBITDA 3,328 (17,199 ) 18,824 (6,566 )
Add (less):
Goodwill and other long lived asset impairments 196 25,489 502 25,489
Costs related to the Compliance Assessment 928 (1) (1,498 ) (2) 7,489 (3)
Financial accounting restatement and remediation costs 21 249
Transaction costs 730 1,480 41
Gain on early extinguishment of debt       (692 )
Adjusted EBITDA 4,254 9,239 19,308 26,010
Add: Rent expense 50,625   49,730   150,837   149,015  
Adjusted EBITDAR $ 54,879   $ 58,969   $ 170,145   $ 175,025  

 

                                                 

(1) Includes compliance costs and professional fees related to the
Compliance Assessment.
(2) Includes a $1.5 million reversal in
revenue reserves and accrued liability for estimated penalties related
to the Compliance Assessment.
(3) Includes a $2.4 million revenue
reserve and $5.1 million of estimated penalties, compliance costs and
professional fees related to the Compliance Assessment.

Contacts

Five Star Quality Care, Inc.
Brad Shepherd, 617-796-8245
Director,
Investor Relations

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