Five Star’s Occupancy Challenges Continue Amid High Competition

Five Star Senior Living (Nasdaq: FVE) has raised its private pay senior living rates in an effort to counterbalance lower revenues caused in part by a sinking occupancy rate.

“Independent living and assisted living revenues combined were flat, as decreases in occupancy were offset with increases in rates,” Five Star President and CEO Bruce Mackey said during Tuesday’s earnings call. “Memory care was the portion of the private pay business where we were not able to overcome occupancy loss with increased rates as this has been the fiercest source of competition over the past year.”

The Newton, Massachusetts-based operator reported $274.5 million in senior living revenue for the first quarter of 2018, which is a 2.8% decrease from the $282.4 million it saw in the same period last year. Occupancy at the operator’s owned and leased senior living communities was 81.7% in the first quarter of 2018, a marked decrease compared to the 83.6% occupancy rate it logged during the first quarter of 2017.

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Five Star is one of the largest senior living operators in the U.S., with 211 senior living communities it owns or leases and 72 it manages across 32 states as of March 31.

For the first quarter of 2018, the operator reported a net loss of $7.9 million, or $0.16 per diluted share, which lagged behind analysts’ expectations by 4 cents. That net loss included gains of $5.7 million in connection with the sale of two senior living communities to Senior Housing Properties Trust (NYSE: SNH) in January and February.

Last year, Five Star agreed to sell six senior living communities to the Newton, Massachusetts-based real estate investment trust (REIT) for an aggregate sales price of $104.4 million. The remaining two sales in that sale manage-back agreement are expected to close during the second quarter of 2018.

Raising the rates

The average monthly rate at Five Star’s owned and leased senior living communities for the first quarter of 2018 was $4,796, a 0.8% increase from its average rate of $4,756 for the same period in 2017.

But revenue from memory care—a service line that Five Star previously singled out as heavily competitive—fell too steeply to be offset by rate increases alone. Memory care revenues were down 5.6% in the first quarter of 2018 when compared with the same quarter last year.

The operator is attempting to mitigate that heavy memory care competition by implementing a new revenue management system. Currently, about one third of Five Star’s communities use this system, but that percentage is expected to grow rapidly in the quarters ahead, according to COO Scott Herzig.

“We’ve been focusing on implementing this sytem at lower occupied communities,” Herzig said. “Our next step will be to focus on communities with greater than 98% occupancy to push our rates immediately, and drive up [revenue per available room].”

The operator’s revenue-managed communities are showing increased move-ins of about 8% each year, compared to those that don’t use the system, Herzig added.

While move-ins for the first quarter of 2018 outpaced the first quarter of 2017’s move-ins by 1.3%, Five Star was plagued by a harsh flu season, an ongoing labor shortage, and competitors building or opening new communities in the markets where it operates.

Bright spots

Despite its challenges, Five Star does have some other initiatives and development projects that should help boost revenue in the year ahead.

Its growing Ageility Physical Therapy division generated $8.7 million in the first quarter of 2018, a 14% increase over the same period one year ago. Five Star opened a total of 16 outpatient clinics in the quarter, bringing the total number of outpatient clinics it operates to 108.

Five Star is also about to open 46 newly converted assisted living units at its The Forum at Park Lane continuing care retirement community (CCRC) in Dallas. Once residents move out of the community’s old assisted living units, the company will convert those to memory care.

Overall, Five Star has three expansion projects at its leased communities that are scheduled to start this year. The company will also continue to evaluate whether to convert skilled nursing units in some of its CCRCs to short-term rehabilitation suites under its “Rehab to Home” banner.

Additionally, the operator is currently in negotiations with Senior Housing Properties Trust to transfer operations of a 70-unit assisted living community from another operator to Five Star.

Five Star’s share prices were flat at $1.20 by the time the markets closed Tuesday.

Written by Tim Regan

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