Q2 2021 Five Star Senior Living Inc Earnings Call

Good afternoon, and welcome to the 5 Star Senior living second quarter 2021 earnings Conference call.

All participants will be in a listen only mode.

Need assistance, please to know a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Can I ask a question you May press Star and then 1 to withdraw your question you May Press Star 2.

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 5 Star Senior living second quarter of 2021 earnings call. The agenda for today's call includes the presentation by President and CEO of Kt Meyer Executive Vice President and CFO, Margaret Wigglesworth, and executive Vice President CFO and Treasurer, Jeff Leer, followed by a question and answer session with research analysts.

I would like to note that the transcription recording of 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 90 to 95 and other securities laws.

These forward looking statements are based on 5 star's present beliefs and expectations as of today Thursday August 5.2021 of.

The company undertakes no obligation to revise or publicly release the results of on your revision to the forward looking statements made on today's conference call other than the 5.

Filings with the Securities and Exchange Commission per SEC regarding this reporting period.

Actual results may differ materially from those projected in any forward looking statements.

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 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 kind of the components to calculate them are available in our quarterly results news release or Investor presentation available on our website at 5 star senior living Dot Com I will now turn the call over to Katy.

Thanks, Olivia and thanks, everyone for joining us on our earnings call for the second quarter of 2021.

Last quarter, we announced our 3 pronged strategy reposition of ball and diversify the 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 5 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 of this repositioning of lines of 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 health care units and the <unk>, 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 health care units and <unk> as well as 27 agility inpatient clinics of Hay.

The switch 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 3 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 the 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 transactions 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 of significant benefit to the resident experience and senior living communities and expect the remaining 11 outpatient clinics and transitioning communities to continue operation.

The 120 communities that we will continue to manage for DHT outperformed 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 EBIT margin.

We are encouraged by the continued momentum of sales leads and tours, which are key components of reclaiming loss of occupancy in our continuing communities.

We anticipate that both our infection control protocols and the vaccination requirement for 5 star team members will help to insulate our communities against possible searches in cases of COVID-19 variance 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 5 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 rightsize 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 service offering and customer base to drive future revenue growth.

I'll now turn the call over to Margaret to discuss the operational results.

Thanks, Katie and good afternoon, everyone.

Our senior living and rehabilitation and wellness services advanced the return to a pre COVID-19 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 of <unk>.

19 explanation will be a condition of employment for 5 star team members, who work in our communities and clinics effective September 1.

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 embraced 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 3 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 14000 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 of 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 of surpassing pre pandemic levels as well as an increase in conversion rate over the past several quarters.

Second quarter tour activity increased 17% from Q1, including a notable of 46% increase in repeat tours of.

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 with 73% 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.

And 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% from the prior year.

Spot occupancy at the end of July was 73, 8% 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, various cases in the U S 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 Revpar for our managed portfolio down 10, 3%.

We have expanded our concession program to remain competitive in the market. However, comparable community Revpar in the managed portfolio showed slight improvement up 1.6% from the second quarter of last year.

While it is difficult to predict the sustained turnaround for our industry against the backdrop of the pandemic, we expect rising vaccination levels will support the safe and robust community as the place to call home and the workplace of choice.

And the 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 net loss of $12.3 million or <unk> 39 per share for the second quarter of 2021 compared to net income of $3 million or <unk> 10 per diluted share for the second quarter of 2020.

Our net loss for the quarter included $15.4 million.

On restructuring costs related to our strategic plan of which $11.5 million will be reimbursed by <unk>.

Adjusted to remove the net restructuring costs of $3.9 million.

Net loss was $9.3 million of <unk> 30 per share.

Adjusted EBITDA for the quarter was negative $4.5 million.

A decrease of $11.6 million from $7.1 million on 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 500 health care units and 27 agility inpatient clinics as part of our repositioning and the closure of 1 leased senior living community in April as the result of a fire.

Which incurred an $890000 asset impairment charge.

Our rehabilitation and wellness services segment reported revenues of $17.5 million.

A decrease of $1.8 million of 9.4% as compared to the prior year period, primarily due to the mentioned the closure of 2007 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, representing 9.3% decline compared to the prior year period, and a 3.9% decline on the sequential basis.

Of the $12.9 million of management fees earned $715000 were attributable to construction management fees of managed communities.

As a reminder, 5 star will continued to receive a 3% capital managed fee on all recurring capital.

Now turning to operating expenses ex.

The impact of reimbursed community level costs and restructuring expenses, our total operating expenses decreased $691000 or 1.1% from the same period last year, primarily due to decreased wages and benefits in connection with the closure of our health care units and inpatient clinics.

General and administrative expenses for the second quarter was $22.7 million, which included $5.1 million of reimbursed by the agency.

Our net G&A expense of $17.7 million increase.

The increased approximately $712000 or 4.2% for the prior year period, primarily due to investments made in our shared services infrastructure as part of the evolve 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 remained elevated due to delays in processing for Covid testing treatment and vaccination administration.

We maintained 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.

Only $7 million of outstanding debt obligations in the form of 1 mortgage note maturing in 2032.

As of today, we do not of any borrowings outstanding on our credit facility.

That concludes our prepared remarks, operator, we are ready to open the line for questions.

Okay.

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 1 to withdraw your question you May Press Star 2.

Our first question today comes from Kyle <unk> from B Riley FBR. Please go ahead with your question.

Good afternoon. This is Kyle on for Brian.

Was hoping you could talk a little bit more about G&A and kind of where you think it will shake out once the 100 day communities are transitioned.

And after you close the remaining term of agility clinics that you plan to.

Yes, I think.

Over the next several.

The quarters, we'll be able to normalize our G&A structure as we successfully.

Think through.

The tradition through the transition of the communities and the agility inpatient clinics.

Okay, and then how long do you think it will take.

To reach your normalized targets you put on your slide deck, yet so 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.

That is hitting the normalization period. After we complete the transition phase of our strategic plan as well as successfully implement the strategies associated with our evolve reception of the strategic plan, which we've made some significant headway, but that will likely.

Come out through the next several quarters.

I would just add to that that also assumed debt.

So that Theres no continuing COVID-19 impact on our operations.

Okay. That's helpful. Thank you.

And then also.

Youre closing about 500 sniff units it looks like most of those have already been closed and.

Do you plan on repositioning pretty much all of those and whats kind of the timeframe that it will take to reposition those and then get those units retailed.

All of those units.

Been closed and we are working closely with THC to evaluate opportunities for the best use for those units.

On there I think it will take some time for us to work through that with them. So I expect that on an ongoing process, but it will probably take some time to reposition of all of them.

Okay.

And then last for me on.

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 youre starting to see that materialize and.

And where do you think occupancy can kind of debt 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 the solution I think as we've talked about in the past.

With lots of people potentially going back to work and going back to school in September and those who have been home taking care of their family member or loved 1 are going to be seeking out solutions. So we expect that there will be an uptick in occupancy.

During the September of the fall timeframe.

Okay. Thank you that's all from me.

Thanks Kyle.

Ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to you 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 of the repositioning phase of.

This important first phase of our transformation will support improved operations as we focus on our core service offering and capitalize on growing 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.