Restructuring on Pace, Five Star Expects Earnings to Turn Positive in 2020

Five Star Senior Living (Nasdaq: FVE) showed continued progress repositioning its senior housing portfolio in the third quarter of 2019, even if the raw numbers were not all pretty.

The Newton, Massachusetts-based provider posted a net loss of $7.1 million for the three-month period ending on September 30. However, that marks an improvement over the $21.6 million loss the company posted a year ago.

This is the second consecutive earnings quarter where Five Star executives said its portfolio restructuring is bearing positive momentum. The company posted a $4.2 million profit in the second quarter — its first quarterly profit in six years.

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“The third quarter of 2019 marked another of demonstrated progress in Five Star’s transformation,” CEO Katie Potter said during an earnings call on Wednesday.

Five Star was hit particularly hard the past couple years by pressures related to oversupply from new construction in its markets, and high labor costs that have impacted the entire senior housing industry. Potter was named CEO in December 2018 with a mandate to reverse the provider’s fortunes and boost its stock value, which was at one point at risk of being delisted by Nasdaq.

Still shaping senior housing portfolio

The provider reported senior living revenues of $270 million in the quarter, a 1% drop year over year. Potter attributed this dropoff to the sale of 18 skilled nursing facilities in the second and third quarters; one-time non-recurring expenses related to its amended lease and ownership agreement with real estate investment trust Senior Housing Properties Trust (Nasdaq: SNH); and continued investment in its workforce.

If the restructured SNH agreement is removed from the accounting, Five Star would have generated $4.1 million in net income, and $8.3 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fixed rent payments were reduced to $11 million per month from $17.4 million per month, as of Feb. 1. Assuming the SNH transaction is completed by Jan. 1, 2020, Five Star expects to start generating positive EBITDA on that date, Director of Investor Relations Michael Kodesch told Senior Housing News via email.

Operational improvements

Five Star has implemented an operational turnaround in tandem with reshaping its portfolio and redefining its relationship with SNH. Communities within the portfolio continue to pursue senior housing certification through consumer ratings company J.D Power, and Five Star ranked third in J.D. Power’s 2019 Senior Living Satisfaction Study.

Five Star also hired Margaret Wigglesworth as COO in August.

Five Star hired 23 new executive directors in the third quarter and rewarded employees with pay raises and bonuses, while company-wide turnover averaged 4.63%, compared to 5.01% for the same period last year, as well as 40 basis points below Q2 numbers. As a result, total wages and benefits increased $5 million in the quarter, year over year.

There are further signs that Five Star’s portfolio restructuring will lead to positive momentum in the near future. Occupancy within its senior living communities increased Q3 to 82.9% from 82.0%, a 90 basis point jump over the previous year.

Occupancy has been an ongoing talking point during earnings season. Brookdale Senior Living (NYSE: BKD), the largest senior housing operator in the U.S., gained 70 basis points sequentially in Q3 and is realizing its best same-store occupancy growth in five years. Chicago-based health care REIT Ventas (NYSE: VTR) reported subpar senior housing performance in the third quarter due to an “unprecedented” combination of market conditions.

Five Star would not comment to SHN on its rate and occupancy strategies, except to note that every community has a unique strategy depending on the submarket-specific supply and demand dynamics.

Year to date, Five Star’s senior housing portfolio generated $821.5 million in revenue, compared to $818.1 million for the same period in 2018, primarily due to increases in occupancy and in revenues attributable to ancillary services, such as rehabilitation and wellness services.

Ageility, Five Star’s rehab and wellness division, continued to post strong numbers, which Potter attributed to capitalizing on growth opportunities in the 55-plus active adult market. The service line generated $12.1 million in revenue in the quarter, a 29% increase year-over-year. Five Star remains on pace to open 30 new clinics this year, and is operating 171 outpatient clinics to date, Kodesch said.

Five Star stock closed trading Wednesday up 4.79%, to $5.03 per share. The company completed a reverse stock split in September which allowed it to regain compliance with Nasdaq as a publicly traded company.

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