Five Star’s Future Still Shaky After Q4 Earnings

Five Star Senior Living (Nasdaq: FVE) acknowledged its continued financial challenges pose a threat to the company’s viability, even as the organization works to implement operational strategies to effect a turnaround. Five Star is also in discussions with its major real estate investment trust landlord, Senior Housing Properties Trust (NYSE: SNH), to potentially restructure.

The Newton, Massachusetts-based senior living operator has previously reported fiscal and operational woes, which continued to cast a cloud over its Q4 2018 earnings call Wednesday. This was the first earnings report and call for Five Star since Katherine Potter was named the company’s new president and CEO last December.

Five Star — which has a portfolio of 283 senior living communities — reported senior living revenue of $276.3 million in the fourth quarter, a 1.1% decrease year-to-year. The company attributed the decline to the sale of six properties to Senior Housing Properties Trust (Nasdaq: SNH). Five Star now is managing those communities The company also sold a skilled nursing facility it previously leased from SNH, to a third party.


Five Star’s Q4 net loss was $23.7 million, or $0.47 per diluted share. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter was minus $12.9 million for the quarter.

Betting on improved operational strategies

Five Star CFO Rick Doyle attributed the majority of the EBITDA decrease to wages and salary expenses. He acknowledged a high turnover rate among its workforce, resulting in the use of contract labor to maintain staffing, driving overtime expenses.

“One of our goals in 2019 is to decrease our turnover rate and eliminate the use of contract labor,” Doyle said.


To that end, Five Star is doubling down on its efforts to improve the employee and resident experience, Potter said. It is renewing its commitment to its team members and is focusing on providing increased training opportunities for staff, as well as providing tools to allow staff to better execute their jobs. But the road will be bumpy, Potter said.

“All team members will be expected to reframe challenges as opportunities,” she said.

The foundation to an operational turnaround has already been laid. Last month, three Five Star independent living and assisted living communities in Florida were the first to receive J.D. Power’s senior living certification. Five Star expects the certification will give the company a marketing advantage to seniors and their families researching their senior living options. The firm expects to have its entire portfolio certified by 2020, Senior Director of U.S. Service Industries Greg Truex told Senior Housing News.

Five Star is also seeing success with its new revenue management program, which was used by 160 of its private-pay communities at the end of 2018. The program is used to continuously adjust pricing to match demand for specific products in specific markets with a goal of maximizing occupancy, Potter said.

Five Star’s overall occupancy was 82.9% in Q4, an increase of 30 basis points year-over year and 90 basis points from Q3. All four segments recorded occupancy growth for two consecutive quarters, led by CCRCs with a 160 basis point gain for its highest occupancy since Q1 2017.

Five Star is enrolling 8-10 communities each month in the revenue management program and expects to have the entire portfolio enrolled by the end of 2019. The program will evolve so that pricing becomes more responsive to changes in the market, Potter said.

The third strategy involves introducing operational segments by certain attributes unique to Five Star service lines and product types. By defining these segments and associated quality standards, Potter said, the company intends to provide a consistent resident experience across each segment and add value by creating brand recognition..

The ultimate goal of this three-pronged approach is to establish a framework for decision making, allowing community leaders to spend more time with staff, residents and clients.

Another area of growth for Five Star is its agility and physical therapy solutions service line. Outpatient clinics recorded $9.5 million in revenues in Q4 — a 16% increase year-over-year. The organization now operates 128 clinics, with 36 opening in the past year.

Discussions with SNH continue

The biggest question hanging over the earnings call was about Five Star’s future. After the company’s Q3 2018 earnings call, the boards of Five Star and SNH formed committees comprised solely of independent directors and trustees, Potter said. Those committees engaged separate advisors to facilitate discussions between the two companies. SNH owns seven Five Star communities.

Since the Q3 earnings report, the two groups have been in talks about a possible restructuring agreement to address Five Star’s liquidity and operating challenges.

Five Star would not comment on the negotiations — or any potential, theoretical outcomes — beyond its prepared remarks during the earnings call, Potter said.

“There may be changes to our agreement with SNH in the future,” Potter said. “However, we cannot be sure that there will be any changes to our agreement with SNH or whether Five Star will be able to continue as a going concern.”

Five Star reported $29.5 million in cash and equivalents at the end of Q4, along with a $51.5 million balance on its revolving credit facility. The company is looking to refinance the facility before it expires in June, Doyle said. But that may be out of Five Star’s hands.

“We cannot be sure that we can obtain any renewed/restructured facility,” he said. “Our ability to do so will likely depend on lenders’ belief that our operating leverage and expected future operating results will improve.”

She did, however, stress that 2019 would be a “transformational” year for Five Star.

“We are looking for a long-term solution to our liquidity challenges but remain focused on operational strategy as part of that turnaround,” she said.

Five Star’s financial woes have been worsening over the past several years. After a period in which the company’s share price declined, shareholders Bill and Bob Thomas took an activist role, offering to buy the company’s owned real estate and also proposing a tender offer priced at $3.45 a share. This tender offer was blocked, sparking harsh words from the Thomases about Five Star’s governance.

Five Star shares were down nearly 2.6% in trading on Wednesday, closing the regular trading day at $0.95 per share

While not every provider has doubts about its future viability, Five Star is not alone among senior living operators facing challenges. Tight labor markets, new competition suppressing occupancy, and other operational headwinds have cast a shadow over the industry. Dallas-based Capital Senior Living (NYSE: CSU) most recently reported disappointing Q4 results as well.

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