AlerisLife Inc.

Afternoon and welcome to the Allure's Life first quarter 2022 earnings call. All participants will be in a listen-only mode. Should you need assistance, please sign out a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press the start and 2. Please note this event is being recorded. I would now like to turn the conference over to Michael Kodeshk, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Alaris Live's first quarter 2022 conference call. The agenda for today's call includes a presentation by Jeff Lear, Interim President and Chief Executive Officer and Chief Financial Officer and Treasurer, followed by 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 the company. 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 Alaris Life's present beliefs and expectations as of today, Wednesday, May 4th, 2022. Company undertakes no obligation to revise or publicly release the result 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. 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. In addition, this call may contain non-GAAP numbers including EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share. Reconciliations of net income to these non-GAAP figures and the components to calculate them are available in our quarterly results news release or investor presentation available on our website at www.alarislife.com. I will now turn the call over to Jeff. Thanks, Michael.

Good afternoon, everyone, and thank you for joining our first quarter conference call. To begin today's call, I want to thank Katie for her years of leadership and vision for both Alaris Life and the senior living industry. Alaris Life has gone through tremendous challenges over the years, including most recently the COVID-19 pandemic, which uniquely impacted all of us and significantly impacted our plans, our people, and our business. At this pivotal time for the senior living industry and our company, It is critical that we continue to maintain our focus on the core business functions of our senior living communities and agility clinics. To do this, we must continue to drive efficiencies and standardized processes that will enable us to better serve our residents and customers and stabilize our financial performance. Our goal is to narrow our focus in the current environment to capture occupancy growth and drive cost efficiencies. While we are not losing sight of our long-term focus on overall strategy, the short-term focus is stabilizing our senior living portfolio and operational excellence. This includes working with our sales teams across our markets to augment targeting strategies and enhance sales techniques to maximize revenues for our portfolio of senior living communities. Additionally, we have made significant investments in our operational support functions that we expect will provide our operations team with the tools they need to face present challenges and adapt to the ever-changing environment. Our board recently retained the healthcare consulting group of Alvarez and Marcel to conduct an operational review. Alvarez and Marcel is a global consulting firm specializing in turnaround management and operational improvement. And we are excited to work closely with their team to improve our operational performance by driving efficiencies, and standardizing processes that will ultimately enable us to better serve our senior living residents and agility clinic customers. Moving to operational results for the quarter. On a sequential quarter basis, same property rev par in our managed portfolio increased 4.4%, while same property rev par in our own portfolio increased 4%. Both rate increases and the continued rollback of concession packages offered in previous quarters helped drive these improvements and more than offset decreases in occupancy from the sequential quarter. Average occupancy in our owned residential portfolio was 71%, a decrease of 100 basis points from the fourth quarter. On a comparable community basis, average occupancy in the managed residential portfolio was 74.1%, approximately in line with both our fourth quarter as well as the industry average for portfolios more weighted and independent living in the first quarter. As we continue to focus on rate in conjunction with occupancy, and as the aggressive concession and discount programs implemented in late 2021 expire, we expect an even further improved EBITDA benefit due to our fixed cost operating structure. On a consolidated basis, Our lifestyle services revenue declined $1.5 million compared to the fourth quarter due to the approximate 2% Medicare fee schedule rate cut, as well as the 15% assistant rate cut. Additionally, revenue decreases were due to lower outpatient revenue as a result of the closure of 17 outpatient clinics that were in communities that transitioned to new operators during the fourth quarter. and an additional closure of five outpatient clinics operating in non-ALERIS operating communities during the first quarter. Overall, our exposure remains limited to government-assisted customers. Approximately 5.5% of our total gross revenues are derived from Medicare and Medicaid payment programs. Recently, CMS has proposed pulling back SNF reimbursement and government-assisted financial support. This is highlighted by the full year 2023 Medicare rate update and phasing out of certain operating waivers. Given that we now have no exposure to SNFs, we believe we have less of an impact from the near-term regulatory risk facing the industry. Moving to our financial results for the quarter. In the first quarter, management and operating revenues were approximately $38.5 million, a decrease of $1.5 million from the sequential quarter, primarily due to a reduction in lifestyle services revenues driven by the Medicare reimbursement rate cuts I just discussed. On residential segment, reported total management and operating revenues of $24.3 million. Of the $8.9 million in management fees earned, approximately $800,000 were attributable to construction management fees as we deployed $25.7 million of capital on behalf of the managed portfolio this quarter for routine community capital improvement. As a reminder, Alaris Life will continue to receive a 3% capital management fee on all routine capital. We expect to deploy approximately $78 million of capital on behalf of the managed communities for the remainder of 2022. Our lifestyle services segment reported revenues of $14.1 million, a decrease of approximately $1.5 million compared to the fourth quarter of 2021. Looking ahead to the next quarter, within our lifestyle services segment, clinic and daily visitation levels have trended upward, and along with seven expected net openings in the second quarter, we expect revenues to increase by approximately $400,000. General and administrative expense for the first quarter was $18.2 million, which included $3.8 million reimbursed by DHC. Our net G&A expense was approximately $14.4 million, which represents a decrease of $1.4 million or 9% from the fourth quarter. Since the second quarter of 2021, we have reduced our gross general administrative costs by $4.6 million or $18 million on an annualized basis, which is above our original target of 12 million mentioned previously. We expect that while we continue to evaluate opportunities to reduce our general administrative costs, we are committed to streamlining our processes and making the necessary investments in our people. For the first quarter, we reported a net loss of $9.7 million, or 31 cents per share, compared to $10.7 million, or 34 cents per share, lost in the fourth quarter of 2021. Adjusted EBITDA for the quarter was negative $5.3 million, compared to negative $6.4 million reported for the previous quarter. Moving to our balance sheet. During the quarter, we closed on a $95 million secured term loan of which $63 million, less closing cost of 3.2 million, was immediately available. In connection with entering this new term loan, we terminated our existing senior secured revolving credit facility, which had no borrowings outstanding and was scheduled to mature in June 2022. Due to timing of funding working capital obligations in conjunction with capital deployments at our own communities, at quarter end, we had approximately $88.1 million of unrestricted cash and cash equivalents. As we have reduced our current working capital obligations, we don't anticipate any elevated levels of these balances in the near term. Throughout the remainder of 2022, we expect to invest up to $16 million in our own portfolio and $2 to $3 million for investments in technology. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roaster. Our first question comes from Brian Maher, B. Reilly SBR.

Good afternoon, Jeff. A couple of questions. We've gotten a lot of questions from investors on the term loan, and the main question revolves around why was there a need to do that given the cash balance that you have and you know, maybe just renew, recast, redo a credit facility as opposed to doing a term loan. Is there anything that you can share with us, you know, that comes up for acquisitions, you know, higher, you know, CapEx that, you know, would facilitate the need for that?

Thanks, Brian. Great question. I think the answer to that is our line of credit was expiring in June of 2022. We were evaluating the best options for maximum liquidity opportunity. This opportunity presented itself and we thought it gave us the best financial stability and security and a stronger balance sheet. In addition, it gave us the flexibility to look at long-term strategic acquisitions as well as the reinvestment of our 20 owned communities.

Okay. When we think about occupancy in the quarter, kind of the headwind there, was it mostly Omicron or was there something else going on? Was there any pushback related to trying to drive rates higher? And how do you see occupancy playing out over the balance of this year?

Yeah, I think Omicron definitely had an impact early on in the quarter, in January, early February timeframe. We also continue to see the demand in the quarter. Demand was more towards a choice-based, I mean, needs-based, less on the choice-based. And if you recall, over 50% of our portfolio is more weighted towards a choice-based. What I will tell you is recently we're starting to see more trend opening up of the choice-based and demand and lead volumes. And I would expect... continued occupancy improvement throughout the remainder of the year, but not as aggressive as we probably would have originally anticipated.

And I know that you're doing a lot of CapEx this year. I think you might have mentioned $78 million for the balance of this year for the DHC managed properties. Is there any kind of displacement because you do that? And that's kind of question 1A. And then what do you see as the kind of immediate first couple of quarters, maybe bounce in occupancy or move-ins following a renovation?

Yeah, the majority of the capital we are looking at is in routine. So it's really in the facility management and making sure the nuts and bolts of the community are operating effectively. There are additional capital being deployed by DHC for renovations and, you know, renovations. What I would say is there isn't any that I'm aware of that will take a community offline. So there should be limited impact on the day-to-day during these renovations.

Now, I guess I'm thinking about it from kind of my lodging coverage hat, which is, you know, when a hotel undergoes a renovation, they kind of take one floor out at a time as opposed to, you know, shutting the whole hotel down. I'm assuming that you have the occupancy bandwidth to maybe work on a wing or a group of rooms at a time, you know, without maybe impacting your occupancy per se. Is that a right way to think about it? That's accurate. Okay. And can you tell us a little bit more in detail what exactly is being done to the facilities You talked about having them run a little bit better, but is there anything kind of cosmetic that's going to give the property maybe a visible uplift relative to new competition coming into any particular market?

I think it's a combination of making sure the communities are refreshed and are competitive with, to your point, new products. but also ensuring we have technology that allows our customers to expand their service capabilities within the community. We've gone through a number of investments with Wi-Fi technology enablement within the community, enhancing not just the resident, but also their visitor experience as they come into our community.

Okay. And you touched upon in your prepared comments the G&A improvement over the past year. Do you think that there's any more – potential to lower that further, or do you think you've pretty much run the course on where you can drive that down to?

Yeah, I think Q1 still had a little bit of an impact on the transition of communities. As we previously stated, there's typically a lag between the time when we transition communities to new operators and the support provided. So I do anticipate a slight improvement in G&A in Q2, but I think you won't see as material of a change as you've seen from Q4 to Q1. Okay.

And then maybe last for me, you know, bringing in Alvarez and Marcel, do you have any thoughts or did you give them any guidance as to what you wanted them to drill down on? Or is it just going to be, you know, they're showing up with, you know, a blank piece of paper, and coming back to you with ideas. And is this going to be mainly at corporate, or is this going to be out in the field as well?

Yeah, I think they are looking at everything. Our focus for Alvarez and Marcel is to really work with management and report to the board, you know, help with the defined short-term strategy that aligns with our long-term goals.

Okay, and maybe one more if I might. The rate increases that you and DHC talked about when you reported fourth quarter numbers, I think the goal was kind of 5% to 10% uplift in rates. Is that still the goal after you saw the first quarter numbers?

Yes, that is still the goal. While we've had pockets of pushback on some of our rate, I think everyone is understanding of just the the inflationary times we're in and is understanding of why we need to do what we need to do.

Okay. Thank you. That's all for me.

Again, if you have a question, please press a star, then one. This concludes our question and answer session. I would like to turn the conference back over to Jeff Lear for any closing remarks.

Thank you for joining us this afternoon. Operator, that concludes our call.

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