Five Star Senior Living continues to cope with the effects of the COVID-19 pandemic on its operations. During the 2020 second quarter, it experienced a 3.8% decline in occupancy from 82.5% to 78.7% across its owned and managed senior living communities. In addition, its average monthly revenue per available room (RevPAR) decreased 4.6% to $3,581. The drop in occupancy equates to an average weekly decline of about 0.3%, which is better than the 0.40%-0.50% average weekly decline anticipated by Diversified Healthcare Trust (DHC), the owner of FVE’s managed properties.
The decline in occupancy is due primarily to the restrictions placed on tenant move-ins by regulators and to a lesser extent to both the normal (deaths and move-outs) and COVID-related decreases in its resident population. Management said that as of August 1, 4.6% of its resident population had tested positive for COVID-19 and 43% of those have recovered (as defined by CDC guidelines).
The move-in restrictions are gradually being lifted; but neither Five Star nor DHC have yet indicated that the rate of occupancy decline has started to slow. I believe that it should begin to slow by the end of the third quarter or perhaps early in the fourth quarter. Management says that there are signs of pent-up demand that should give an initial boost to the rebound in occupancy. Still, it is difficult to predict whether and when occupancy will return to pre-COVID levels.
Despite the continuing pressure on the business, Five Star’s financial performance has improved since it restructured its arrangements with DHC at the end of 2019. Its leases on DHC’s owned properties have been cancelled and replaced with management contracts that allow FVE to earn a fee (equal to 5% of gross revenues) and to be reimbursed for operating expenses that it incurs.
As a result, Five Star has generated positive EBITDA (according to my definition) for three consecutive quarters; but EBITDA has decreased steadily over that period due to declines in occupancy and RevPAR offset partially by reduced operating expenses. With occupancy and RevPAR expected to show further declines, I anticipate that Five Star will report negative EBITDA in 20Q3 and then hopefully EBITDA that is less negative beginning in 20Q4. EBITDA will most likely turn positive in the first half of 2021.
Along with the recent (but deteriorating) improvement in profitability, Five Star’s cash position has improved from $31.7 million at the beginning of the year to $76.1 million at the end of June. However, the improvement was entirely due to factors that are unsustainable. The company is holding $4.7 million in CARES Act relief funds, some of which was advanced for skilled nursing facilities that it no longer owns; so it will probably have to return that portion of the funds to the government eventually. In addition, FVE has deferred the payment of $8.8 million of payroll taxes, as permitted under the CARES Act, most of which will be reimbursed eventually by DHC. The company has also increased its accruals for accounts payable, compensation expense and self-insurance obligations significantly, mostly because it has not yet been reimbursed for these expenses by DHC.
Likewise, although capital spending on its owned and managed properties is up year-to-date over the prior year, both FVE and DHC have suspended remodeling projects across most of their senior living communities, due to both the restrictions presented by the lockdown and the need to conserve cash. Based upon management’s comments, it looks like capital spending for 2020 will be half of what it was in 2019. Eventually, FVE and DHC will have to catch up on their capital spending. Most of FVE’s 20 owned senior communities have not had a major face-lift since the late 1990s.
Although much of the cash may be spoken for, Five Star ended the quarter with only $7.4 million of mortgage debt outstanding and no borrowings under its $65 million bank credit facility. That facility is scheduled to mature in June 2021, but FVE has the option to extend it for one year.
On another positive note, the company reports steady growth at Ageility Physical Therapy Solutions, its rehabilitation and wellness services division. Ageility’s revenues were $19.3 million in the quarter, up 5.6% over pro forma 2019 second quarter results. Its operating margins were 21.7% vs. 10.1%. The division has now become FVE’s largest source of unreimbursed revenues.
Given the uncertainty in its operating and financial outlook, valuing FVE is a speculative exercise at this point in time. At the recent price of $4.97, the stock is trading at 77% of its tangible book value.
With an equity market capitalization of about $157 million, $7 million of outstanding debt and ignoring the cash on hand, FVE’s enterprise value-to-EBITDA ratio is only 5.7 times on a trailing 12 month basis; but it is 10.1 times based upon annualized 2020 second quarter EBITDA of $4.0 million (times four). The lower EV-to-EBITDA ratio on trailing 12 month earnings suggests that the stock is cheap assuming a return to pre-COVID levels of occupancy and RevPAR.
Five Star’s stock has performed quite well relative to both the broader market and its peer group so far in 2020. On a year-to-date basis, the stock is up 32.8%, compared with the 9.3% decline in the S&P SmallCap 600 Index (SML). Since bottoming on March 18, FVE is up 80% vs. SML’s 38%.
Five Star’s stock has also outperformed its peer group on a year-to-date basis. Here, its peers include Brookdale Senior Living (BKD), Capital Senior Living (CSU), Ensign Group (ENSG), Genesis Healthcare (GEN) and National HealthCare (NHC).
The stronger relative performance could be an early sign of a quicker-than-anticipated turnaround in Five Star’s operating and financial performance.
August 12, 2020
Stephen P. Percoco
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