Five Star Senior Living 21Q3 Update

Again Lowering EPS Estimates; Reducing 6-12 Month PT and Maintaining Outperform Rating

Five Star reported a third quarter net loss of $10.2 million or $0.32 per share, less than the second quarter’s loss of $12.3 million or $0.39 per share.  I had estimated a loss of $0.18.

The $0.14 shortfall from my estimate was due mostly to a $3.3 million or $0.10 per share charge on the termination of three senior living community (SLC) leases.  The remaining $0.04 shortfall was from higher than projected losses on the core business, mostly from lower average revenue per occupied room (RevPOR) and a decline in expenses reimbursed by DHC.

The decline in RevPOR is a concern because it offsets part of the benefit from improving occupancy, potentially delaying the company’s rebound to sustained profitability.  The concessions that Five Star is offering seem modest – waiving community fees and half-a-month’s rent for 1-3 months – so the decline in RevPOR should be temporary.  On the other hand, there are no signs that the company will cease offering them anytime soon.

Besides contending with this and other aftershocks of the pandemic, Five Star has made progress on its strategic repositioning.   As October 31, 107 of 108 smaller SLCs have been transitioned to new operators.  The 108th will be sold or redeveloped.  It will complete its exit from skilled nursing by year-end.  Ageility, its rehabilitation and wellness business, has succeeded in retaining its clinics at most of the transitioned SLCs and is now opening 2‑3 new ones per month.  Five Star is aligning corporate overhead costs with its now smaller footprint.  A new enterprise resource planning (ERP) system should reduce administrative costs by $5-$7 million annually.  The company also received $39.3 million due from DHC in 21Q3, sooner than I anticipated, and used the proceeds to reduce payables and other accrued costs.

Based upon the higher-than-anticipated 21Q3 loss and continued pressure on RevPOR, I have reduced my 2021 EPS outlook to a loss of $0.75 (from a loss of $0.62 previously) and to $0.06 in net earnings for 2022 (vs. $0.13). I have also lowered my 6-12 month price target again (to $5.50 from $6.00), but I am maintaining my outperform rating.

FVE’s stock has fallen modestly since my previous report in August.  Yet, the price action on the stock for the past three months looks constructive, with a steadily improving base forming from the August/September lows of around $3.80.

This is a summary of my update report on Five Star Senior Living (FVE). If you are interested in obtaining the full report, please contact me.

November 10, 2021

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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