Five Star’s Sales Leads Drop 50% in April, More Deterioration Expected

As with other publicly traded operators, Five Star Senior Living (Nasdaq: FVE) did not escape the first quarter of 2019 unscathed by the coronavirus pandemic.

Five Star entered 2020 with 82 newly hired executive directors and a new operational agreement with its primary landlord, Diversified Healthcare Trust (Nasdaq: DHC), and both companies were focused on driving operational improvements throughout the year.

But average per-week sales leads at Five Star communities decreased 50% in April, compared to what the operator typically sees, COO Margaret Wigglesworth said.

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“Given that the effects of Covid-19 began in earnest in late March, we expect continued deterioration in the near term,” she said.

Safety regulations geared to protecting residents from the virus, meanwhile, may remain in place for the foreseeable future even as markets begin to relax shelter-in-place restrictions — especially in assisted living and memory care, Diversified President and CEO Jennifer Francis said.

“I think social distancing is here to stay in senior living for a period of time, regardless of whether states start to open up. Because of the at-risk population, operators will continue to have social distancing and sheltering in place,” she said.

Both companies indicated that protecting their balance sheets will rank second to protecting residents on the list of priorities.

Signs of operational improvement

Before Covid-19 disrupted everything, Five Star was seeing progress in its transition strategy. The Newton, Massachusetts-based operator reported a net loss of $17.2 million, or $0.55 per diluted share in the first quarter — a $16 million improvement over the previous year.

The main factor in the improvement was a decrease of $53.4 million in rent in connection with the Diversified restructuring. Earnings before interest, taxes, depreciation and amortization (EBITDA) in Q1 2020 was minus-$13.1 million, a $9.7 million improvement, year-over-year. 

Combined revenues and management fees for the Diversified portfolio decreased to $38.4 million in the first quarter, from $270.5 for the same period last year, due again to the restructuring, which reduced the number of communities Five Star owned and leased from 190 to 24, while increasing the number of managed communities from 76 to 244. Revenues at Five Star-operated communities since January 1, 2019 fell by 0.9% in the quarter to $20.7 million, mainly from declines in occupancy and average monthly rates.

Occupancy fell 1.6% year-over-year in owned and leased communities to 81.3% in the quarter, while in managed communities occupancy decreased 1.1% in the quarter, to 82.9%

As of May 3, there have been 345 confirmed Covid-19 positive cases in Five Star’s portfolio, representing 1.4% of its total population, Wigglesworth said. Most cases have occurred in 11 communities that are in Covid-19 hotspots such as the New York City metro area.

“These cases, across 46 communities, represent about 17% of our SHOP and triple net senior living communities combined,” Francis said.

Solid balance sheets, slower disposition activity

The lease restructurings and other financial moves have put Five Star and Diversified, also based in Newton, on firm financial footing to ride out the Covid storm.

Five Star was also able to hold the line on expenses in the quarter. It reported $3.3 million in senior living operating expenses for its owned and leased portfolio — a 52% decline year-over-year. This was primarily due to reduced repair maintenance costs, and certain consulting fees attributable to non-recurring investments made throughout 2019.

Five Star saw interest expense for the first quarter plummet 58% in the quarter to nearly $400,000, due to low borrowings on its credit facility.

Still, revenue was down — RevPAR in owned and leased communities fell from $3,974 in Q1 2019 to $2,938 in Q1 2020, and from $3,401 to $3,360 in managed communities — but same-store margins for the owned and leased communities improved 850 basis points, year over year, Wigglesworth said.

On another positive note, conversion rates have held relatively steady even as sales leads have plummeted. The drop in new leads has been seen across the industry; consumer inquiries were down 41% in April, according to recently released data from Enquire.

Five Star also had a positive balance sheet prognosis. As of March 31, the provider had approximately $36.6 million of cash and cash equivalents, on hand, along with $7.4 million of outstanding debt obligations and no outstanding borrowings on a $65 million secured credit facility announced last June.

Five Star also reported growth in its rehabilitation and wellness division, Ageility Physical Therapy Solutions. The service line, which includes 244 clinics, reported $21 million in revenues in the quarter, a 21.7% increase over the previous year. But shelter-in-place orders forced these to shutter as the quarter came to a close, and development of new Ageility locations slowed: Five Star managed to open 13 new clinics in the quarter.

“We believe Five Star will maintain financial stability for the future and be well positioned to maximize value for shareholders,” President and CEO Katie Potter said.

Diversified ended Q1 2020 with approximately $70 million of cash and equivalents on hand, along with $415 million available on its $1 billion revolving credit facility, CFO Richard Siedel said.

The REIT previously sold $47 million of senior living assets subsequent to the end of the quarter, and repaid $200 million of 6.75% senior notes that were set to mature in mid-April.

Additionally, Diversified’s board of directors agreed to reduce its dividend to one cent per share per quarter, preserving roughly $33 million of capital each quarter as of March 31. It has also deferred $150 million of previously budgeted capital expenditures across its senior housing and office segments.

But the pace of its disposition strategy has slowed considerably during the outbreak, with several deals falling through as a result of the difficulties of conducting physical diligence while under shelter in place orders. Some deals are still being pushed over the finish line, and Diversified will trigger a six-month extension option on a $250 million unsecured term loan, currently scheduled to mature in June, as well.

“The vast majority of our assets remain unencumbered. In the past, we have utilized financing from Fannie Mae and believe we could raise capital by placing secured debt on a portfolio of our senior living properties to provide additional liquidity, if we thought it was necessary,” Siedel said.

Furthermore, Diversified provided $75 million of consideration in exchange for the shares issued as part of the restructuring, of which $51.5 million was settled as of March 31 and $23.5 million was settled subsequent to quarter end, CFO Jeffrey Leer said.

Five Star ended trading Thursday up 11.7%, to close at $3.44 per share. Diversified stock closed at $2.81 per share, a 5.71% decrease.

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