Ancillaries, initiatives help offset occupancy challenges at Five Star

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Bruce Mackey
Bruce Mackey

Ancillary services and initiatives that generate income and resident satisfaction, as well as capital improvements and expansions at communities, are helping to offset decreases in occupancy and revenues at Five Star Senior Living in the face of senior living community oversupply, executives said Thursday in a third-quarter earnings call.

“The third quarter was a challenging quarter for us and the senior living industry as a whole,” said the Newton, MA, company's president and CEO, Bruce Mackey.

Same-store private-pay independent living and assisted living revenues were down in the third quarter, but only by 0.6% year over year, despite occupancy decreases, Mackey said. On the other hand, same-story ancillary income, which includes Five Star's rehab and wellness program, was up approximately 9.8% year over year.

“This is an example of how, in the wake of such large competition and operational headwinds, we have been able to hold revenues steady on our core businesses and have developed strong programs and initiatives to create new sources of income and strengthen the company,” the CEO said.

Total occupancy at owned and leased communities was 83.8%, down from 84.3% sequentially and 85% year over year, Senior Vice President and Chief Operating Officer Scott Herzig said, and at managed properties, occupancy was 86.4%. Five Star saw the most growth in occupancy in independent living, he said.

Competing communities are newly opened or opening soon within 10 miles of more than half of Five Star communities in the markets tracked by the National Investment Center for Seniors Housing & Care, Herzig said. If the radius is reduced to five miles, one-third of Five Star communities are affected in this way.

“We are also seeing similar activity in the markets where NIC does not track these data,” he added.

Five Star, Herzig said, is addressing the challenge in several ways; among them:

  • Capital improvement and refurbishment projects. “This approach has negatively impacted earnings in certain areas as we take units offline in order to complete the work faster,” he said, “but over time, we feel that keeping our buildings looking great will help us compete over the long term.”
  • Programs such as a popular point-of-sales system that offers more food and dining venue choices for residents. “Although currently only in a handful of our buildings, we can directly point to this new offering as a reason for occupancy growth in the buildings where it is operational,” Herzig said. Five Star plans to introduce the program in some additional communities before the end of the year and add it to 10 more buildings next year, he added.
  • Outpatient services offered through Five Star's Rehab and Wellness Division in 76 independent living and assisted living communities in 13 states. So far this year, Herzig said, the company has opened 13 outpatient areas. “These are built into existing areas of our communities for a very minimal investment and typically pay for themselves in as little as nine months,” he said. “This is a much-sought-after amenity and a revenue-enhancing program that produced nearly $5 million in revenues in the third quarter, up 23% from the year prior.”

Five Star has adjusted rates in competitive markets, Herzig said, “but it's really nothing different than anyone else has been reporting. There's a lot of new competition coming on in certain markets, and we're just dealing with it the best that we can.”

Mackey added: “It's a balance. We've got to be selective about where we discount rates and where we sacrifice occupancy for rate.”

Acquisitions, dispositions

Senior living acquisitions and dispositions in the third quarter:

  • In July, Five Star began managing a 163-unit senior living community in Alabama that is owned by Senior Housing Properties Trust (SNH).
  • In September, Five Star sold a 32-unit community it owned for $200,000. Five Star and SNH also sold a vacant skilled nursing facility in Wisconsin for approximately $200,000. And SNH entered into an agreement to acquire two senior living communities for $18.6 million. The two properties, in Illinois, have a total of 126 living units. Five Star plans to lease these two communities from SNH under one of Five Star's existing master leases with the trust.
  • In October, Five Star agreed to manage four senior living communities owned by SNH. They have a total of approximately 350 units. Five Star also entered into an agreement to acquire a 63-unit  assisted living community in Illinois for $7.9 million. Five Star expects this acquisition to close by year end.

The five October deals involve communities that are 100% private pay and are located in markets where Five Star already has a presence, Mackey said. They are expected to generate about $1.2 million of additional management fee revenues, he added.

Mackey said he expects the sales and management deals will generate additional income for the company's ancillary services business.

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