Five Star Senior Living Inc.

Good afternoon and welcome to the Five Star Senior Living Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please to know a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Olivia Snyder, Manager of Investor Relations. Ma'am, please go ahead.

Thank you. Welcome to Five Star Senior Living's second quarter of 2021 earnings call. The agenda for today's call includes a presentation by President and CEO Katie Potter, Executive Vice President and COO Margaret Wigglesworth, and Executive Vice President, CFO, and Treasurer Jeff Lear. followed by a question and answer session with research analysts. I would like to note that the transcription, recording, or retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, Thursday, August 5th, 2021. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission, or SEC, regarding this reporting period. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, this call may contain non-GAAP numbers, including EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share. Reconciliations of net income to these non-GAAP figures and the components to calculate them are available in our quarterly results news release or investor presentation, available on our website at 5starseniorliving.com. I will now turn the call over to Katie.

Thanks, Olivia, and thanks everyone for joining us on our earnings call for the second quarter of 2021. Last quarter, we announced our three-pronged strategy, Reposition, Evolve, and Diversify, beginning with the repositioning of our Senior Living Management Services offering and the continued growth of our Agility Outpatient Rehabilitation Services. During the second quarter, Five Star made strong progress on the first phase of this plan, which is intended to optimize our senior living portfolio and drive greater profitability as industry conditions stabilize. As a reminder, this repositioning aligns our business with areas of operational strength and with favorable market opportunities. By transitioning 108 of our smaller managed senior living communities to new operators, closing the healthcare units in the CCRCs we will continue to manage and completing our exit from the skilled nursing business. We are pleased with the swift execution of our plan to date, completing the planned closure of all healthcare units and CCRCs, as well as 27 agility inpatient clinics, a pace which exceeded our initial estimates. The anticipated revenue loss is reflected in our financial results for the quarter. However, we believe the strategic exit from skilled nursing will best position us for long-term growth and success. We have maintained our focus on growing our agility outpatient rehabilitation services and successfully opened three net new clinics in the second quarter and increased same-store revenues by 7.3% year-over-year. We expect to continue to expand our agility footprint and have experienced additional growth from our agility fitness offering. While still comprising only a small portion of our overall business, fitness revenues have increased by more than 50% over the past year. Turning to community transitions, Diversified Healthcare Trust has entered into agreements to transition 76 of the 108 communities to new operators, and we have completed the transition of 41 communities to date. We anticipate the remainder of community transitions will be completed by year end. Of the 44 agility outpatient clinics located in transitioning communities, to date, 33 are confirmed to remain in operation. We continue to believe our agility rehabilitation services are a significant benefit to the resident experience in senior living communities, and expect the remaining 11 outpatient clinics in transitioning communities to continue operation. The 120 communities that we will continue to manage for DHC outperform the total managed portfolio in the second quarter, with 340 basis points higher average occupancy, 270 basis points higher operating margin, and 300 basis points higher EBITDA margin. We are encouraged by the continued momentum of sales, leads, and tours, which are key components of reclaiming lost occupancy in our continuing communities. We anticipate that both our infection control protocols and the vaccination requirement for five-star team members will help to insulate our communities against possible surges in cases of COVID-19 variants that we see on the rise across the country. We continue to focus on expanding our rehabilitation and wellness services segment and driving the evolution of our business to serve the changing needs and preferences of the growing older adult population. Above all, we are proud of our team's response in the face of this unpredictable virus. And our commitment to safety, well-being, and delivering an enriching customer experience across the company is unchanged. As part of our strategic plan, we are implementing changes to our corporate infrastructure to increase efficiency and support improved operations, which will ultimately drive cost savings for Five Star. As we focus on our core senior living management services, we expect to make progress towards realizing our G&A and other expense targets throughout the remainder of 2021 and into 2022 as we fully transition the 108 communities and right-size our workforce. As we move through the phases of our strategic plan, we will continue to prioritize the evolution of our differentiated resident experience to meet market demand and opportunity, as well as the diversification of our services offering and customer base to drive future revenue growth. I'll now turn the call over to Margaret to discuss operational results.

Thanks, Katie, and good afternoon, everyone. As our senior living and rehabilitation and wellness services advance their return to a pre-COVID environment, We are hopeful for continued momentum toward recovery from the impact of this unprecedented challenge. We are thankful for the dedication of our team members, not only as we have adapted to the changing needs of our residents and clients over the past year, but also as we now move forward with the important strategic transformation of our business. As announced in June, a COVID-19 vaccination will be a condition of employment for five-star team members who work in our communities and clinics effective September 1st, which we believe is essential to ensuring the safety and well-being of all team members, residents, and clients. This commitment to safety supports our path to sustained recovery as we welcome new customers to our communities and clinics and embrace the return to a full and robust community experience. Let me start with an update on our rehabilitation and wellness operation. As Katie mentioned, We successfully opened three net new agility outpatient clinics in the second quarter which partially offset the decrease in overall segment revenues due to the closure of 27 of the 37 inpatient clinics as part of our strategic plan. Outpatient revenues increased by 11.4% year over year and on a comparable clinic basis increased by 7.3% over the prior year period and 5.2% sequentially as clinic visits increased with the easing of pandemic restrictions. On a comparable clinic basis, total visits in the second quarter increased by 14,000 visits, or 10.4% over the prior year period. Agility fitness revenues have also increased 12.9% sequentially and 56% over the prior year, reflecting our focus on growing our ancillary services to support a differentiated experience and reach a broader customer base. Turning to our senior living segment. Since the completion of the first round of vaccination clinics throughout our communities, confirmed COVID-19 cases have declined to the lowest level since the pandemic began. We have continued to see strong sales activity, particularly with referrals and web leads surpassing pre-pandemic levels, as well as an increasing conversion rate over the past several quarters. Second quarter tour activity increased 17% from Q1, including a notable 46% increase in repeat tours. Our conversion rate is at its highest since the fourth quarter of 2019, and only 50 basis points off the 2019 average. On a comparable community basis, spot occupancy in the owned and leased portfolio at the end of July was 70.3%. an improvement of 60 basis points from the end of the second quarter and 170 basis points from the end of the first quarter. Second quarter average occupancy decreased 60 basis points sequentially and 10.6% from the prior year. This sequential decline is an improvement over the past several quarters, which posted average occupancy declines of 300 basis points or greater. In our comparable managed communities, which is adjusted to reflect only the retained managed portfolio following the repositioning. Average occupancy increased 20 basis points sequentially, while declining 9.7 percent from the prior year. Spot occupancy at the end of July was 73.8 percent, an improvement of 50 basis points from the end of the second quarter and 60 basis points from the end of the first quarter. We expect to continue to see gradual increases in occupancy across our communities. However, we are keenly aware of the recent rise in COVID-19 variant cases in the US that may impact operations across the industry. REVPAR continues to be challenged due to depressed occupancy, with comparable community REVPAR for the owned and leased portfolio down 13.9% from the same period last year. and comparable community rev par for our managed portfolio down 10.3%. We have expanded our concession programs to remain competitive in the market. However, comparable community rev pour in the managed portfolio showed slight improvement, up 1.6% from the second quarter of last year. While it's difficult to predict a sustained turnaround for our industry against the backdrop of the pandemic, We expect rising vaccination levels will support a safe and robust community as a place to call home and a workplace of choice. And a return to pre-COVID conditions, along with continued execution of our strategic plan, will support our momentum toward recovery. I will now turn the call over to Jeff for a discussion of the financial results.

Thank you, Margaret. During the second quarter, we made strong progress on the repositioning phase of our strategic plan. which drives the majority of our financial results for the quarter. Last night, we reported a net loss of $12.3 million, or 39 cents per share, for the second quarter of 2021, compared to net income of $3 million, or 10 cents per diluted share, for the second quarter of 2020. Our net loss for the quarter included $15.4 million of restructuring costs related to our strategic plan, of which $11.5 million will be reimbursed by DHC. Adjusted to remove the net restructuring cost of $3.9 million, net loss was $9.3 million, or 30 cents per share. Adjusted EBITDA for the quarter was negative $4.5 million, a decrease of $11.6 million from $7.1 million in the prior year period. Second quarter management and operating revenues were approximately $46.8 million, a decrease of $7.8 million, or 14.3% from the prior year, primarily due to the impact of the closure of approximately 1,500 healthcare units and 27 agility inpatient clinics as part of our repositioning, and the closure of one leased senior living community in April as a result of a fire which incurred an $890,000 asset impairment charge. Our rehabilitation and wellness services segment reported revenues of $17.5 million, a decrease of $1.8 million and 9.4% as compared to the prior year period, primarily due to the mentioned closure of 27 inpatient clinics, partially offset by the opening of 15 net new outpatient clinics since April 1, 2020. The closure of the inpatient clinics as part of our strategic plan resulted in a sequential decline in revenues of $2.1 million, or 12% from the first quarter. Our senior living segment reported total management and operating revenues of $29.3 million. Total revenues represent a 9.3% decline compared to the prior year period and a 3.9% decline on a sequential basis. Of the $12.9 million in management fees earned, $715,000 were attributable to construction management fees at managed communities. As a reminder, Five Star will continue to receive a 3% capital management fee on all recurring capital. Now turning to operating expenses. Excluding the impact of reimbursed community-level costs and restructuring expenses, our total operating expenses decreased $691,000, or 1.1%, from the same period last year, primarily due to decreased wages and benefits in connection with the closure of our healthcare units and inpatient clinics. General and administrative expenses for the second quarter was $22.7 million, which included $5.1 million reimbursed by DHC. Our net G&A expense of $17.7 million increased approximately $712,000, or 4.2% for the prior period, primarily due to investments made in our shared service infrastructure as part of the evolved phase of our strategic plan. Moving to COVID-19 related expenses. With increased vaccination levels, certain health and safety protocols have been refined. However, our self-insured health insurance costs remain elevated due to delays in processing for COVID testing, treatment, and vaccination administration. We maintain a strong foundation of financial liquidity and are confident that we are well-positioned to execute the remainder of our strategic plan. As of June 30th, we had approximately $99.3 million of unrestricted cash and cash equivalents and only $7 million of outstanding debt obligations in the form of one mortgage note maturing in 2032. As of today, we do not have any borrowings outstanding on our credit facility. That concludes our prepared remarks. Operator, we are ready to open the line for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer period. Once again, to ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Our first question today comes from Kyle Benjies from B. Riley FBR. Please go ahead with your question.

Good afternoon. This is Kyle. I'm for Brian. I was hoping you could talk a little bit more about GNA and kind of where you think it will shake out once the one away communities are transitioned. And after you close the remaining 10 agility clinics that you plan to.

Yeah, I think over the next several quarters we'll, be able to normalize our G&A structure as we successfully think through or transition through the transition of the communities in the agility and patient clinics.

Okay. And then how long do you think it will take to reach your normalized targets? You know, you put in your slide deck some normalized targets for wages and benefits and G&A. Do you think that'll happen pretty immediately? in the next few quarters after those communities are transitioned, or will it take some time thereafter?

It will likely take some time thereafter. You know, that is hitting a normalization period after we complete both the transition phase of our strategic plan as well as successfully implement the strategies associated with our evolved section of the strategic plan, which we've made some significant headway, but that will likely come out through the next, you know, several quarters.

And Kyle, I would just add to that, that also assumes, you know, that there's no continuing COVID impact on operations.

Okay, that's helpful. Thank you. And then also, you know, you're closing about 1,500 SNF units. Looks like most of those have already been closed and Do you plan on repositioning pretty much all of those and what's kind of the timeframe that it will take to reposition those and then get those units refilled?

All of those units have been closed and we are working closely with DHC to evaluate opportunities for the best use for those units. I think it will take some time for us to work through that with them. So I expect that will be an ongoing process, but it will probably take some time to reposition all of them.

Okay. And then last for me, you know, we're hearing a lot about how we should get a boost in occupancy post-Labor Day as people go back to work and back to school. I mean, would you say you're starting to see that materialize? And where do you think occupancy can kind of get to by year end?

I think we're definitely, given our tour and lead activity, we're definitely seeing increased interest in senior living as a solution. I think as we've talked about in the past, you know, with lots of people potentially going back to work and going back to school in September, those who have been home taking care of their family member or loved one are going to be seeking out solutions. So we expect that there will be an uptick in occupancy during the September or the fall timeframe.

Okay, thank you. That's all from me.

Thanks, Kyle.

And ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the floor back over to Katie Potter for any closing remarks.

Thank you for joining us this afternoon. We are pleased with the progress made on our strategic plan, particularly the repositioning phase. This important first phase of our transformation will support improved operations as we focus on a core service offering and capitalize on a growing target demographic. We look forward to updating you on these exciting changes in the coming months.

Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending. You may now disconnect your lines.