How Five Star is Trying to Make Up for Lower Occupancy

Facing occupancy challenges, Five Star Senior Living (Nasdaq: FVE) is undertaking initiatives to drive revenue. These include expanding wellness and rehabilitation programs and decreasing the company’s reliance on third-party referral sources that charge fees, Five Star executives said Thursday in a call with analysts.

“The third quarter was a challenging quarter for us and the senior living industry as a whole,” said President and CEO Bruce Mackey.

Newton, Massachusetts-based Five Star, the nation’s fourth-largest provider by resident capacity, cited new supply as a particular issue. Earlier in the week, Brookdale Senior Living (NYSE: BKD)—the largest provider nationally—also said that new supply in secondary markets had created “unprecedented” competition in the third quarter.

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Among metro areas where new supply is tracked by the National Investment Center for Seniors Housing & Care (NIC), more than 50% of Five Star locations have seen or are poised to see new supply coming online within a 10-mile radius, said Mackey. And Five Star also is seeing activity in markets not being tracked by NIC.

Five Star took a hit to its occupancy due to the influx of new competitors. For its owned and leased senior living communities, occupancy in the third quarter was 83.8%, compared with 84.3% a quarter earlier and 85% a year ago.

Despite declining occupancy, Five Star leaders touted that revenue has not been unduly impacted, thanks in part to the addition of services.

“Same-store private pay assisted living and independent living revenue were only down 0.6% year-over-year despite the decreases in occupancy over that same time period,” said Mackey. “Our same-store ancillary revenue, including rehab and wellness programs, is up approximately 9.8% year-over-year, which offset the decrease in private pay assisted living and independent living revenues. This is an example of how, in the wake of such large competition and operational headwinds, we have held revenue steady on our core businesses and develop new sources of income.”

One way Five Star is expanding its rehab services is through a Rehab to Home initiative. This converts skilled nursing units in the company’s continuing care retirement communities (CCRCs) into high-end suites for younger, short-stay Medicare patients. The latest Rehab to Home project is set to open in South Carolina, with others in the works in Indiana, Ohio, Arizona, and Delaware, Senior Vice President and COO R. Scott Herzig said on Thursday’s call.

In addition to the Rehab at Home program, Five Star now provides outpatient rehab and wellness services in 76 assisted living and independent living centers in 13 states. The company has opened 13 of these clinics so far in 2016 and plans to open one more by year end, said Herzig. These are built into existing communities and “typically pay for themselves in as little as nine months,” he added.

They produced $5 million in third-quarter revenue, up 25% year-over-year.

Referral shift

In addition to creating new revenue streams, Five Star is seeking to contain costs. And one way of doing that is reducing its reliance on third-party referral sources such as A Place for Mom, Herzig said.

In the last year, Five Star has slashed its number of move-ins originating from A Place for Mom from 8% to 4%, according to Herzig.

In addition to getting referrals from its existing residents, Five Star is seeking to leverage its own website more. Now, the Five Star website accounts for 17% of move-ins, up 36% year-over-year.

“Our goal continues to be to drive people to our own website, rather than relying on referrals from third-party referral sources, due to their high cost, low conversion rate, and low length-of-stay,” said Herzig.

Five Star is not the only provider to express discontent with third-party referral sources. But the high number of consumers using these services proves there is a need for them, and providers that work with A Place for Mom maintain organic leads and add 2% to 3% of leads on top of that, APFM General Manager of Canada Trina Carey told SHN in June 2015.

A Place for Mom had not responded to requests for comment as of press time.

Silence on Senior Star

Five Star executives refused to take questions or comment on an ongoing tussle with activist shareholder Senior Star, an Oklahoma-based senior housing owner and operator.

About a year after unsuccessfully pressing Five Star to sell 33 of its owned properties to Senior Star, the Oklahoma company in the past weeks has angled to gain a greater stake in Five Star by buying more shares.

Specifically, Senior Star co-founders William Thomas and Robert Thomas said they intend to make a tender offer of 10,000,000 shares priced at $3.45 per share. This came after a company owned by Five Star Managing Director Barry Portnoy made a tender offer for the same amount of shares, priced at $3.00 per share.

Five Star and Senior Housing Properties Trust (NYSE: SNH)—the real estate investment trust that owns the majority of Five Star properties—then rejected Senior Star’s requests for certain waivers and permissions needed in order to proceed with the tender offer.

Portnoy’s company also responded to Senior Star’s tender offer, arguing that the Thomas brothers would be unlikely to go through with it. One reason was that the Thomases already had begun the process of making nominations to Five Star’s board, which would not be allowed if they were given the green light to go through the tender offer.

In a related development, the Thomas brothers sent a letter to Senior Housing Properties Trust dated Oct. 28, requesting that the REIT waive certain contractual rights to clear the way for the Thomases’ board nominee to be elected without triggering a default under the Five Star lease agreement.

SNH rejected this request in a letter dated Nov. 1.

“Your letters do not identify who you intend to propose for election to Five Star’s board, what the qualifications of that person may be or, importantly, what you or your nominee may intend regarding the SNH leases,” the letter stated. “In such circumstances, SNH is not willing to provide the waivers you requested. Finally, we note that your request (which was delivered after the close of business on Friday, October 28, 2016) for a response in less than two business days is an urgency of your own making, which the SNH Board does not appreciate.”

In light of the silence on the Senior Star matters during the earnings call, one analyst told Five Star leadership that he and his colleagues—and investors—would benefit from more open communication on this subject.

Overall, Five Star’s third quarter earnings per share of -$0.14 missed analyst expectations by $0.08. Its revenue of $344.7 million missed by $0.6 million. The share price of $2.80 at the end of the day on Thursday was unchanged from the closing price a day earlier.

Written by Tim Mullaney

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