Vaccination of 90% of Residents Raises Visibility on a Rebound in Occupancy
Five Star reported slightly stronger 20Q4 results than anticipated, due primarily to gains on investments held by its captive insurer. Average occupancy across its owned and leased senior living communities (SLCs) declined by 320 basis points (bp) to 71.5% in the quarter, comparable to the decline reported for 20Q3. Average occupancy at SLCs managed for Diversified Health Care Trust (DHC) declined 293 bp to 72.3% in 20Q4. The decline in managed community average occupancy was 54 bp slower than that reported for 20Q3. At year-end, the company said that “spot” occupancy was 70.7%.
The slide in 20Q4 occupancy was sparked by the latest wave of the coronavirus. In a March 2021 presentation to investors, FVE disclosed that COVID-19 cases among its residents spiked in 20Q4 to more than 2.7 times the 20Q3 level. So far in 2021, the rate of infection has decreased significantly. During February, infections were among the lowest recorded since the start of the pandemic. Spot occupancy was down only 10 bp to 69.4% in February.
While it is too early to call a bottom in occupancy, visibility to a bottom has definitely increased. Although more than 90% of residents have received the first dose of the vaccine, improvement in occupancy now depends mostly on move-ins. There are some encouraging signs in sales leads and move-ins, as well, which in February were 71.6% higher than the April 2020 lows. But against the prior year, the pace of February leads and move-ins was down 30%.
Even so, a bottom in occupancy seems likely before mid-year. After that, occupancy will probably fluctuate over time as it gradually moves higher. It is still unclear whether the pandemic will cause any longer-term changes in demand that may cap the upside in occupancy below pre-pandemic levels. Although new construction of SLCs has fallen off significantly during the pandemic, it will come back as long as interest rates remain low and if industrywide occupancy improves meaningfully. This could further cap the upside in Five Star’s occupancy.
Despite the uncertainty, Five Star appears to be well-positioned to navigate through the rest of the pandemic. The company has very little debt outstanding and should exit the pandemic with cash that it can use to upgrade and expand its operations. My 2020 projections, which assume that occupancy flattens out over the next few quarters with some modest improvement in operating margins, anticipate 2021 earnings of $0.23 per share, with further improvement in 2022. Based upon recent developments, I am raising my performance rating on the stock to moderately outperform with a 12-month price target of $8.00.
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March 14, 2021
Stephen P. Percoco
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