Five Star Senior Living (Nasdaq: FVE) is making progress on its recently announced repositioning effort, and intends to “evolve” and “diversify” as part of a three-pronged strategy, CEO Katie Potter said Thursday.
That diversification could involve managing communities for a wider range of ownership groups, as well as broadening the scope of business beyond senior living communities and the company’s Ageility therapy services.
“We are planning continued growth of our other service offerings, including fitness, home health and concierge services, which are all existing areas of organic growth for the company,” Potter said.
Five Star has been going through a reinvention period. Potter took the reins as CEO as the company was facing stark financial challenges, which led to a restructuring in 2019 with its primary real estate investment trust partner, Diversified Healthcare Trust (Nasdaq: DHC).
Just a few weeks ago, Five Star and Diversified announced another major change: 108 communities owned by the REIT and managed by Five Star will be transitioned to other operators. Going forward, Five Star will focus on operating larger communities with lower-acuity resident populations, including continuing care retirement communities (CCRCs.). However, Diversified and Five Star are in the process of closing and repurposing all the skilled nursing units in those CCRCs.
These community transitions are taking place as the industry begins to recover from the effects of Covid-19, and leaders with Diversified and Five Star reported positive momentum in sales leads and occupancy.
“We had 400 move-ins in our SHOP [senior housing operating] portfolio in the week beginning April 25, and that’s the most move-ins we’ve had in the portfolio in 14 months,” Diversified CEO Jennifer Francis said Thursday, during the REIT’s Q1 2021 earnings call.
Community transitions underway
The 108 communities that are transitioning to new management are primarily smaller buildings and will go to regional operators.
“We’ve talked to dozens of operators, and then issued RFPs to probably more than 20 operators; we’ve interviewed 10 but are expecting to interview another 10,” Francis said. “We’ve even started touring some of those operators and doing some diligence.”
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So far, Diversified does not intend to sell any of the 108 communities, and is confident that with the right operators they can perform well.
“I would say that they are not weak communities,” Francis said. “We’ve spent a good deal of time with Five Star, talking about their strengths. They spent a lot of time thinking about where they can excel, and the determination was that they’re better at managing larger communities with residents who have a lower level of care.”
The transitions are expected to be completed by the end of 2021, and Five Star is bullish on the portfolio of 144 communities across 28 states that the company will be managing for Diversified going forward.
“Seventy-five percent of the communities that we will continue to manage for DHC are located in markets where the median income of the over-65 population can afford an average monthly rent of $4,000, and 70% are in markets with no current new competition under construction,” Potter observed.
Furthermore, Q1 2021 occupancy in these communities was 320 basis points higher than the average occupancy of the managed portfolio, and the EBITDA margin at these communities was 400 basis points higher than for the managed portfolio.
Five Star and Diversified have long been closely tied, as both companies are affiliated with alternative asset management company The RMR Group. Following the portfolio repositioning, Diversified will be working with a greater variety of operators, and Five Star also will be looking to forge management contracts with a larger number of ownership groups.
“Right now, we’re really focused on completing the repositioning and improving operations within that portfolio,” Potter said. “I think when other owners can see our operational strengths coming through in that portfolio, we’re going to be able to identify opportunities.”
Diversification of revenue is another strategy that Potter has already been pursuing; Ageility has been a bright spot for the company, and that continued in the first quarter of this year. Five Star opened eight new Ageility locations, exceeding the company’s expectation of two to four openings. Ageility’s operating margin improved 4.8% year-over-year, said COO Margaret Wigglesworth.
Potter believes that the future lies in serving older adults within and outside of senior living communities.
“We find our emerging customer to be one that values a curated approach to meeting their care needs and lifestyle aspirations, especially one that enhances their ability to retain independence and improve quality of life,” Potter said.
Occupancy dips low but trending up
The Covid-19 pandemic has led to historically low senior living occupancy rates; average occupancy slumped to 78.8% in Q1 2021, according to data from NIC MAP Vision. Diversified and Five Star fared worse than that, with occupancy in DHC’s SHOP portfolio falling to 69.5% in the first quarter.
But, thanks largely to high Covid-19 vaccination rates, census is moving in the right direction.
“We believe we are now in the early innings of an occupancy recovery, which showed its first signs in March as occupancy improved 30-bps over February,” B. Riley Securities Analysts Bryan Maher and Kyle Menges observed in a note issued Wednesday.
Spot-occupancy at the end of April was up to 71.8%.
Executives at Diversified and Five Star are also bullish on continued improvement, given sales trends.
“We had close to a 30% increase in leads in the first quarter over the fourth quarter of 2020, more than 40% increase in web leads, so we’re really starting to feel a change,” Francis said.
While move-ins will doubtless drive financial recovery, expenses remain elevated. Diversified’s Q1 operating expenses came in at $287.4 million, which was above B. Reilly’s estimate of $283.5 million. Adjusted EBITDA for Diversified, of $73.2 million, also came in slightly under B. Reilly’s estimate but beat the consensus estimate of $65.4 million.
Five Star’s financial results beat B. Reilly’s expectations, although that was in part due to $7.8 million in CARES Act funding that the provider received. And, general and administrative expenses of $22.6 million exceeded B. Reilly’s $19.7 million estimate. Five Star expects annual G&A savings of $12 million on a normalized basis, as a result of the operator transitions and related reductions in corporate infrastructure.
While management at Diversified and Five Star were upbeat about the improvements in occupancy and made their case for the repositioning effort, Raymond James Analyst Jonathan Hughes pressed the REIT’s leaders about the strategy.
Noting that other public REITs have recently merged, Hughes asked whether RMR has explored a sale of the company or a review of strategic alternatives as an option, rather than operator transitions and CapEx investments in the portfolio.
“The board has conversations and weighs all options on a regular basis,” Francis said. “ … We’re really focused on stabilizing our senior living portfolio as a way to maximize shareholder value.”
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