Five Star Senior Living Inc.

Good afternoon and welcome to the Five Star Senior Living Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I would now like to turn the call over to Michael Kodish, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Five Star Senior Living's third quarter 2021 conference 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, November 4, 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'll now turn the call over to Katie.

Thanks, Michael. Good afternoon, everyone, and thank you for joining us for our third quarter 2021 conference call. As we enter the eighth month of our strategic plan to reposition our business and meet the needs and desires of our evolving customer, I am pleased to say that our transformation is taking shape. To begin today's commentary, I wanted to spend a moment summarizing the environmental drivers behind this strategic direction before moving into the achievements made this quarter within each phase of the plan, reposition, evolve, and diversify. Even before the pandemic began, the demographic makeup of our customer base was undergoing a significant shift. Specifically, the median age of our resident has steadily increased, while the average length of stay is decreasing, resulting in incremental resident turnover. This dynamic not only impacts the growth and consistency of our revenues, but also drives additive unit costs and marketing expenses. In 2004, OSHA reported that the median age of an assisted living resident was 84 years old. In 2019, the median age increased by over three years to 87.1 years old. As of 2019, the average length of stay in an assisted living community was 22 months, while the average length of stay in independent communities was over a year longer at 37 months. Given these dynamics, we believe we can drive a more efficient business by focusing on a younger and lower acuity customer. Additionally, today's customer is seeking a more independent lifestyle with access to a vast array of what we call concierge services. which provides them options to choose the services they want or need, as well as financial flexibility. These services are designed to enhance and customize the resident experience, differentiate our offering from the competition, and provide us the opportunity to engage the customer earlier in their aging process. In communities that offer high quality service options, such as our agility rehabilitation services, residents are healthier, stay longer, and drive ancillary revenues relative to residents at communities without these service offerings. Prior to the pandemic, internal data showed that after adding an agility clinic, the average length of stay at a community increased by 31%, compared to that same or similar community without a clinic. In addition, communities that have partnered with agility have seen a 36% reduction in the rate of falls, which translates to fewer residents requiring hospital visits or higher levels of care. The goal of this organizational transformation is straightforward. We are repositioning our business to meet the present and future demands of the older adult customer. Operationally, we will continue to focus on areas of strength, secure top talent throughout the organization, establish a scalable and efficient operating structure, and continue to decrease our G&A as we invest in our corporate infrastructure that is both scalable and sustainable. Now, moving into the actions taken during and subsequent to the third quarter to achieve these goals. We are nearly complete with the repositioning phase of our three-prong strategy. As of today, we have successfully transitioned 99 of the 108 smaller, higher-acuity communities to third-party operators, with the balance expected to be completed before year-end. Following the completion of this process, our senior living segment will be approximately 52% independent living units, a significant increase from 38% independent living units prior to the repositioning phase taking effect. As a reminder for the balance of this phase, we closed all of the skilled nursing units in the CCRCs that we will continue to manage on behalf of GHC and expect to completely exit the skilled nursing business by year end. As we begin to wrap up these repositioning efforts, we are now starting to turn more attention to the evolved phase of our strategic plan by investing in our corporate infrastructure to scale and support operations. An example of our work in this phase includes the implementation of corporate enterprise resource planning systems, which we expect will automate certain high volume manual transactional functions and save between $5 and $7 million in G&A costs annually. Also, we are focused on making community investments to enhance the resident experience, such as improved wireless connectivity, upgrading resident transportation services, and modernizing common areas and resident units. Our partner, Diversified Healthcare Trust, has been publicly vocal about its commitment to the senior living space and plans to contribute a significant amount of capital to improve the competitive nature of the communities we manage on their behalf. Finally, before I turn the call over to Margaret to provide an operational update, I wanted to spend some time discussing the final phase of our strategic plan, Diversify. As our customer demands change, we need to be agile and anticipate these needs in order to attract and retain residents within the communities we own and manage, in addition to engaging with customers outside these communities earlier in the aging process. In reference to the earlier comments I made, we are concentrating on revenue diversification opportunities that synergistically drive performance at our senior living communities and provide us with the opportunity to engage with customers sooner, such as agility rehabilitation services. While we have nothing to announce at this time, we are actively pursuing an expansion of our concierge services. In the meantime, we continue to actively grow our rehabilitation and wellness services segment This quarter, we successfully opened five net new agility outpatient rehabilitation clinics up to net new clinics from the second quarter. We expect to continue to expand our agility footprint and have experienced additional growth from our agility fitness offering. Finally, we will retain all of the 45 agility outpatient clinics located in transitioning communities. I'll now turn the call over to Margaret to walk through an operational update for the third quarter.

Thanks, Katie, and good afternoon, everyone. We were pleased to report in September that all team members who work in or visit our communities and clinics were in compliance with our requirement that they be vaccinated against COVID-19. We anticipate that both infection control protocols and vaccination requirements for five-star team members will continue to improve the safety of those residents and team members in the communities we own and manage, as well as provide an additional level of comfort for prospective customers. Overall, the newly emerged Delta variant of COVID-19 has slowed the senior living operational recovery during the third quarter, and the environment remains highly competitive. We are currently seeing rent concessions being offered by our competitors across our markets, putting additional pressure on RAVPAR growth. However, we continue to see strengthening demand. Sales leads grew by approximately 24% from the second quarter, driven in large part by an increase in digital leads, which were up 49% over the second quarter. In our total senior living segment, same community REVPAR was down 60 basis points from the second quarter, largely driven by the impact of concessions during the quarter, partially offset by increased average occupancy of 70 basis points. Same community average occupancy in the owned portfolio was up 210 basis points to 70.4%, while same community average occupancy in the managed portfolio was up 50 basis points to 73.4%. Looking ahead, month-end October occupancy in the 120 retained communities managed on behalf of DHC was up 30 basis points to 74.9%. relative to month end September results. Similarly, month end October occupancy in the 20 community owned portfolio was up 10 basis points to 73% relative to month end September. Moving to our rehabilitation and wellness operations. On a consolidated basis, rehabilitation and wellness services net operating income, excluding depreciation and restructuring expenses, increased 3.4% from the second quarter. And as Katie previously mentioned, we successfully opened five net new agility outpatient clinics in the third quarter. On a comparable clinic basis, total visits in the third quarter increased to 141,000 visits, which represents a 3.9% increase compared to pandemic lows. Agility fitness revenues have also increased 3% sequentially and 35% over the prior year, reflecting our focus on growing our ancillary services to support a differentiated experience and reach a broader customer base. I will now turn the call over to Jeff for a discussion of the financial results.

Thank you, Margaret. For the third quarter, we reported a net loss of $10.2 million, or 32 cents per share. Our net loss for the quarter included $3.3 million on lease terminations, and $1.2 million of restructuring costs related to our strategic plan, of which $800,000 will be reimbursed by DHC. Adjusted EBITDA for the quarter was negative $3.3 million, an improvement of $1.2 million on a sequential basis. Our financial results continue to reflect the impact of the reposition phase of our strategic plan, which Katie discussed in detail earlier. I'll spend most of my time today discussing how our results were affected by the strategic plan, investments we are making in the business to improve cost containment, and general expectations of how these actions may affect certain financial line items moving forward. Third quarter management and operating revenues were approximately $42.9 million, a decrease of $3.8 million from the sequential quarter, primarily due to the impact of the transition of 69 communities during the quarter, which impacted our management revenues by approximately $1.2 million, and the full quarter impact of the closure of 27 inpatient agility clinics, which negatively impacted revenue by $1.2 million. Our senior living segment reported total management and operating revenues of $27.5 million. Total revenues represent a 12.6% decline on a sequential basis. Of the $11.2 million in management fees earned, Approximately $700,000 were attributable to construction management fees and managed communities. As a reminder, Five Star will continue to receive a 3% capital management fee on all recurring capital. We expect to deploy approximately $20 to $30 million of capital in the fourth quarter on behalf of the managed communities. Our rehabilitation and wellness services segment reported revenues of $15.4 million, a decrease of $2.1 million compared to the second quarter, primarily due to the closure of 27 inpatient clinics. Looking ahead to the fourth quarter, we have transferred an additional 30 communities to third party operators as of today and anticipate we will transition the remaining communities by year end. We expect senior living segment revenues as it relates to these transitions will decrease fourth quarter revenues by approximately $2.3 million. Within our rehabilitation and wellness services segment, With clinic and daily visitation levels expected to be largely consistent with the third quarter, we anticipate fourth quarter revenues to be approximately in line with third quarter as well. Now turning to operating expenses. Excluding the impact of reimbursed community-level costs and restructuring expenses, our total operating expenses decreased $6.2 million or 10.3% from the second quarter, primarily due to decreased wages and benefits in connection with transitioning communities and the corporate infrastructure that supported these communities. As a result, Five Star's consolidated operating margin, excluding G&A, depreciation, and restructuring-related expenses, was 31.8%, up from 26.1% in the second quarter. General and administrative expense for the third quarter was $21.8 million, which included $4.9 million reimbursed by DHC. Our net G&A expense was approximately $17 million, which represents a decrease of $735,000, or 4.2% from the second quarter, as we continue to rationalize our workforce and make investments within our corporate structure to drive efficiencies across our platform. During the quarter, we incurred $1.1 million of costs associated with our diversification strategy and another $600,000 for settlement of a state tax matter that is included in our net G&A Expense. Excluding these costs, net G&A would have been $15.4 million or a decline of 13% on a sequential basis. As mentioned on previous calls, while we expected the pace of G&A reductions to lag that of revenue decline as a result of the infrastructure required to maintain operations at transitioning communities, we expect G&A savings to materialize more rapidly in the coming months. By April 2022, we expect to cut G&A expense by a total of $12 million compared to pre-strategic plan levels on an annualized basis by right-sizing the workforce of our organization. Moving to our balance sheet, we continue to have a comfortable level of cash and balance sheet liquidity affording us the necessary coaching to execute the remainder of our strategic plan. As of September 30th, we had approximately $80.2 million of unrestricted cash and cash equivalents and only $6.9 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 $65 million credit facility. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we will pause momentarily to assemble our roster. The first question will be from Kyle Menges of B Reilly FBR.

Hi, this is Kyle. I'm for Brian. So it looks like new leads continue to be up, which is a good sign. I was curious just if you could talk a little bit about some of the challenges you've faced in converting new leads to move-ins. I mean, is it more just competition in the industry, given all the vacancy right now? Or are you seeing, I guess, common apprehensions that people have that are keeping them from moving in, and if those are dissipating at all?

Hi, Kyle. Yes, we are excited to see leads continue to improve. I do think there is a certain amount of concern as a result of the Delta variant, and it may be delaying decision-making, particularly in the geographies where we have concentration of communities. So I do think there continues to be some challenges out there around Delta. In addition, given COVID, we weren't able to deploy capital the way we had hoped this year between supply shortages and also, again, just COVID impact. We continue to work towards improving and updating our communities, but that pace has slowed.

Okay, that makes sense. And then I was curious, you've talked a little bit in the past about concessions. I think you mentioned you were granting concessions of somewhere between one to three months of free rent. I'm curious if that's pretty much stayed the same in the back half of this year, or if anything's changed there.

It hasn't changed very much. I think we all hoped, sort of emerging out of COVID, that occupancy would move back at a very fast pace. That being said, the competition in the marketplace is significant. And so while Five Star hasn't traditionally pursued concessions, because as I said on prior calls, we very much believe in the value of the services that we provide. Because of the competitive marketplace in targeted markets, we are offering concessions somewhere between one and two months.

Okay. Okay. And then could you talk a little bit about the progress in getting boosters to your residents? And I was also curious what percent of residents have now gotten a booster versus what percent originally got vaccinated?

Hi, Kyle. Sure. We implemented a booster mandate for our team members a couple of weeks ago. And because eligibility for a booster is on a rolling basis, depending upon which vaccine you receive, We expect that our team members will all be vaccinated with a booster by February of next year. With respect to residents, we've been offering the booster during our flu clinics since boosters were approved, and we've been at flu clinics since the end of August.

Okay. Thanks for that, caller. And then turning to agility, I was curious, I mean, I know I've noticed that agility margins have come down a bit over the course of this year. I'm curious what's going on on the revenue side. I mean, it looks like revenue per visit has come down a little bit year over year. And also just any color you can provide on the cost side.

Yeah, Kyle, this is Jeff. So to just add a little color, on a consolidated basis, the inpatient business for agility had operated at a traditionally higher margin. And as of June 30th, 27 of those inpatient clinics were closed. So that had an impact on the consolidated results. When looking at just outpatient, the reason for the decline in margin is really attributable to our vaccine mandate on September 1st, which had a bit of workforce disruption. And so the revenue declined roughly 8% per clinic due to that disruption. And that's really what 808 our margins. We do anticipate, though, that with the stabilization of our workforce, there is demand out there and that we will start to see that right size itself in the next quarter or two.

Okay. And what do you think margins would look like kind of once the clinics are right size, so to speak?

Our overall goal is always to be double-digit margin. You know, I would anticipate us to continue to improve our margin from current levels in the range of, you know, 1 to 200 basis points per quarter.

Okay. And then you keep talking about opening two to four clinics per quarter, so about 12 a year. And if I look out, you know, over three years, that would be basically 40 new clinics in the market. Do you think that's pretty easy for the market to handle, you know, 40 clinics over the next few years?

Yeah, we continue to see demand for the product. It's clear that, you know, as we noted in our remarks, there's a lot of value that the agility product brings to a senior living community in terms of length of stay as well as positively impacting clinical quality measures. As an example, You know, I mentioned in, I think, my remarks that, you know, we intend, we are going to retain the 45 outpatient, Agility is going to retain the 45 outpatient clinics in the transitioning communities. And we see those companies, you know, as a real opportunity for Agility to continue to expand. They're now creating relationships with those new operators who, and hope, you know, have the potential to expand into those portfolios. So we do think there's demand and an opportunity for us to meet the two to four clinics over the next couple of years.

Great, that's helpful. And then just one more kind of housekeeping thing. So it looks like you still have 10 more inpatient clinics to close. I know six of which you've extended for another year, keeping open. And I'm curious, I guess, just what you think the timing will be on the closure of those other four clinics?

I mean, as we're working with the new operators, and so as they identify new inpatient rehab partners, we will transition. Obviously, the residents and their rehab care is our most important focus. And so when we feel like we can work with those operators to successfully transition those residents to new inpatient providers, then we will move ahead.

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

Thanks, Kyle. Once again, if you have a question, please press star then 1 at this time. Seeing no further questions, this concludes our question and answer session. I would now like to turn the conference 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, and we look forward to updating you on these exciting changes in the coming months.

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect. Have a great day.