New name, existing programs for Five Star, executives say

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Five Star CEO Bruce Mackey
Five Star CEO Bruce Mackey

A new name and established programs will carry Five Star Senior Living through 2017, executives told shareholders, analysts and others participating in an earnings call on Friday.

The company officially has changed its name from Five Star Quality Care to Five Star Senior Living, President and CEO Bruce Mackey said.

“The name change represents Five Star's focus on not just providing the highest-quality healthcare but also on providing exemplary hospitality, amenities and personalized services dedicated to maximizing the independence and enhancing the lifestyle of our residents,” he said. “In 2001, we started the company with a focus on clinical care and have evolved it into the full-service healthcare, hospitality and lifestyle provider that it is today.”

Tender offer

When Five Star had its third-quarter 2016 earnings call in November, President and CEO Bruce Mackey would not comment on the tender offer that one of its managing partners, Barry M. Portnoy, and his son, Adam, had made via a subsidiary to their ABP Trust called ABP Acquisition.

At the time, two Five Star shareholders had urged their fellow shareholders to reject the offer, saying it is was “grossly undervalued, fraught with deep conflicts of interest, and fails to provide full and fair value to Five Star shareholders.”

The time was right for Mackey to talk on Friday, however. During the company's fourth-quarter earnings call, he said:

"In November, ABP Trust, an entity owned by one of our managing directors, made a significant equity investment in Five Star through a tender offer. ABP Trust believed that the common stock represented an attractive investment, and both they and our independent directors felt that the ownership stake acquired further aligned the intentions of the board member and those at Five Star. ABP Trust is now a 37% shareholder of Five Star's common shares, and those shares are locked up for 10 years.”

Total occupancy for the fourth quarter at the company's owned and leased senior living communities was 83.9%, up slightly from 83.8% sequentially and down from 85% year-over-year, Chief Operating Officer Scott Herzig said.

In an effort to improve occupancy and cash flow this year, Mackey said, the company plans to continue concentrating on six previously announced areas: internal expansions and external acquisitions, capital investment in existing communities, revenue-generating initiatives designed to complement current operations, expense efficiencies, human capital investment, and programs to improve resident satisfaction.

“All these initiatives will strengthen our business, not only in the current oversupply operating environment but also well into the future,” he said.

Ancillary services

Five Star saw a 20% increase in ancillary revenue, including its rehabilitation and wellness business, in the fourth quarter, Mackey said, although the increase was offset by a 1.1% decrease in independent, assisted and skilled nursing revenues.

The company's Rehab to Home initiative, for which existing skilled nursing beds in its continuing care retirement / life plan communities are converted to private rehabilitation suites targeting younger Medicare-eligible patients for shorter stays, “makes us a preferred provider in the markets where we have these units,” Mackey said.

Since the launch of the initiative, the company has opened 125 units in five communities, he said, adding that the company's most recent conversion, in the fourth quarter, was in South Carolina.

“We have three other projects well underway in Indiana, Ohio and Arizona,” Mackey said. “Our Indiana project should open by the end of March, and the other two will likely open up in the second quarter of 2017.”

The company also now operates 77 outpatient rehab clinics, Herzig said, having added 15 new clinics in 2016. The company plans to open 15 more clinics in 2017, he said, “and for the first time, we will look to expand our outpatient rehab services into non Five Star-affiliated communities.”

Annual outpatient revenues grew to more than $18 million in 2016, an improvement of 17% over 2015, Herzig said.

Human resources

Labor and benefit costs in the fourth quarter of 2016 totaled $137 million, or 49% of senior living revenues, an increase of approximately 1.8% compared with the same quarter last year, Chief Financial Officer Rick Doyle said. Mackey called the increase “excellent, considering the wage pressures we are seeing in some markets.”

Five states in which Five Star operates were affected by minimum wages in 2016, Mackey said, with more than twice that number affected in 2017. Most of the company's workers are at or above the minimum wage already, however, he added.

State-mandated minimum wage increases affect labor costs overall, Doyle said. “Combine this with the added challenge of keeping quality talent in-house and away from new competitors and we feel our team has done a tremendous job at keeping these expenses in check.”

Five Star increased its investment in its staff in 2016 through its Rising Star program, which “identifies outstanding individuals looking to become difference-makers in senior living operations and provides them with an intensive training program designed to develop them into successful executive directors,” Herzig said, adding that the program currently has six enrollees. “We'll look to continue to move more folks through the process on an ongoing basis at approximately every-six-month interval,” he said.

Expense reductions

Nonwage senior living operating expenses for the fourth quarter were $72 million, or 26% of senior living revenues, a decrease of approximately $1.2 million, or 1.6%, compared to the same period in 2015 after adjusting the 2015 period for a litigation settlement expense, Doyle said.

The company has realized savings by implementing company-wide brand standards that leverage its size, he said. Five Star, for example, recently entered into a laundry program agreement with Procter & Gamble and in 2017 is planning to consolidate its cable TV and internet programs.

Five Star has realized additional savings by relying more on resident and website referrals rather than third-party lead aggregators, Herzig said.

“Our content-rich Five Star website now accounts for nearly 17% of move-ins, up 29% year-over-year,” he said. “Conversely, move-ins from A Place for Mom are down to less than 5% of our total move-ins, which is down 47% from the year ago.”

Resident satisfaction

A point-of-sale dining program that promotes resident choice was one of the company's “best-reviewed programs” of 2016, Herzig said.

“Having the ability to dine in a full-service coffee bar, sports pub or a fine-dining restaurant of your choosing has been a big differentiator for us where we have rolled this program out and has positively impacted occupancy in those particular communities,” he said. Five Star plans to introduce the program to more communities this year, he added.

New or expanded communities

In December, Mackey said, Five Star added five communities to its managed portfolio and two communities to its leased portfolio.

The five managed communities, all in Georgia, are owned by Senior Housing Properties Trust and contain a total of approximately 395 private-pay units. “Georgia is now our sixth-largest state as far as unit concentration,” he said, adding that the new communities are expected to generate approximately $1.2 million of additional annual management fee revenues.

The two leased communities, in Illinois, were acquired by Senior Housing Properties Trust and have a combined 126 private-pay units, Mackey said. “Prior to the addition of these communities, we operated nine communities with a total of approximately 900 units in the state,” he said, adding that annual earnings before interest, tax, depreciation and amortization from these communities is expected to be approximately $150,000.

“We also see additional opportunity for our ancillary businesses to benefit from both of these managed and leased additions,” he said.

Five Star opened three expansions in three states in 2016, Mackey said.

In the second quarter of this year, he said, the company expects to break ground on a 32-unit memory care community on a leased CCRC campus in Delaware and a 91-unit independent living community in Tennessee adjacent to an existing assisted living and memory care community that it owns.

The units are expected to open in 2018, he said. “Obviously, there is a supply concern out there that's been talked about, but I think we're doing it a little bit different,” he said. “We're adding on units to existing Five Star communities that have a strong track record, have high occupancies, and we can really leverage what's existing at that current community.”

The company also is looking at two projects in California that would add 72 memory care units at two communities, one at a CCRC that it leases and one at a community that it manages. “We will continue to evaluate other expansion projects at existing communities as we look for ways to take advantage of market opportunities and find growth internally,” he said.

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