Newton, MA-based AlerisLife will reduce costs by approximately $14 million and invest approximately $4 million under recommendations made by a consulting firm it hired, to “drive efficiencies and standardize processes that will enable us to better serve our residents and customers and stabilize our financial performance,” President and CEO Jeffery Leer said Thursday during the company’s second-quarter earnings call.
AlerisLife, as it shared the news of the departure of president and CEO Katherine “Katie” Potter, said in early May that it would conduct an operations review. In late June, the company noted general recommendations from the healthcare consulting arm of Alvarez & Marsal as it announced the appointment of Leer as Potter’s permanent successor. The company indicated at that time that details of the plan would be provided during the company’s second-quarter earnings release.
In that release, issued late Wednesday afternoon, the company said that the $14 million in cost cuts will come through streamlining redundant business processes and reducing investments in non-core functions, rationalizing information technology systems to those that directly support core business functions — and ensuring their optimal utilization, and continually assessing general and administrative expenses to identify more opportunities to save money.
The $4 million in investments, according to AlerisLife, will be made to refocus the company’s core business and support projects, processes and systems to enhance operations in its residential (Five Star Senior Living) and lifestyle services (Ageility Physical Therapy Solutions and Ageility Fitness) divisions.
Specifically, AlerisLife said, a chief operating officer and a chief financial officer will be hired, the latter to succeed Leer, who continues to serve in his former role as CFO until a replacement is named. Additionally, the sales function will be centralized with reinstituted regional sales support. The investments also will include “a scalable and agile national operations infrastructure to drive operational excellence and results,” according to the company.
The changes, Leer said Thursday, would include “adjustments to the structure of operational support” and “meaningful reorganization of our sales and marketing programs.”
“Many of these augmented targeting strategies and enhanced sales techniques were deployed within our own portfolio as a pilot program during the quarter,” he added, “and we expect to expand these new sales strategies to the broader portfolio this quarter.”
Net loss, earnings improve
The CEO provided an overview of AlerisLife’s operational and financial results for the second quarter during the earnings call.
AlerisLife reported a net loss of $8.8 million, or 28 cents per share, in the second quarter, although that result compares with a loss of $9.7 million, or 31 cents per share, in the first quarter.
Adjusted earnings before interest, taxes, depreciation, and amortization for the quarter were negative $1.3 million, a $4 million improvement compared with a loss of $5.3 million reported for the first quarter.
“At quarter end, we had approximately $83.5 million of unrestricted cash on our balance sheet,” Leer said. Excluding capital expenditures and non-recurring severance and consulting fees, he added, cash lost from operations was approximately $2.5 million during the second quarter.
Throughout the remainder of 2022, Leer said, AlerisLife expects to invest up to $10 million in its owned portfolio and $1 million to $2 million in technology.
The residential (senior living) segment “experienced solid momentum” in the quarter, he said.
Occupancy at the end of the second quarter was 75.5% in the portfolio of 20 communities owned by AlerisLife and 75.4% in the 120 communities AlerisLife manages for Diversified Healthcare Trust. The percentages represent increases of 340 basis points (3.4%) and 80 basis points (0.8%), respectively, from the end of the first quarter. Revenue per available room increased 4.8% in the owned portfolio and 1.7% in the managed portfolio, Leer added.
“While we are encouraged by the quarterly improvement, we believe the June performance will carry into [the third quarter], and we are making further investments in sales and marketing to ensure the momentum will continue,” he said.
Average occupancy in the owned portfolio increased 120 basis points (1.2%) from May to June, and July average occupancy increased an additional 160 basis points (1.6%) compared with June, Leer said. “Similarly, average occupancy in the managed portfolio increased 50 basis points [0.5%] from May to June and increased an additional 40 basis points [0.4%] in July,” he added.
Sales lead volume increased 6% compared with the first quarter, Leer said, adding that the increase was driven mainly by a continued focus on marketing through the company’s digital leads platform.
“We conducted over 6,334 tours throughout the quarter, of which 1,759 were repeat tours,” he said, adding that the company’s tour-to-sale conversion rate was 27.3% in the quarter, an increase of 450 basis points (4.5%) over the first quarter. The increase, he said, “highlights our immense focus on enhancing our sales tactics to improve occupancy.”
Concessions, turnover down
Concessions affected revenue per occupied room, Leer said. Concessions now are being offered in certain markets on a case-by-case basis, he added, whereas at the end of last year and the beginning of this year, they were used “as a programmatic strategy to attract prospective residents.”
“We expect the impact of these concessions to lessen as we move into the back half of the year, which we believe will support additional topline revenue growth,” Leer said.
Regarding expenses, Leer said that wages and benefits as a percentage of revenue were 50.3% in the second quarter, a decrease of 210 basis points (2.1%) from the first quarter. “Annualized employee turnover also moved lower from the first quarter, decreasing over 1,000 basis points [10%] to 63.2%,” he added.
Leer said that AlerisLife “will continue to make investments in our labor force to attract and retain top-tier talent within our residential segment, which in turn will reduce turnover, the need for costly agency labor and ultimately lower the expense level needed to operate our owned and managed communities.”
Operating expenses, use of contract labor down
Operating expenses decreased approximately $3.7 million, or 2.1%, from the first quarter, Leer said, noting that the decrease came “despite US inflation at record levels.”
Base wages were up 6% from the first quarter, whereas other residential expenses decreased approximately $700,000, he said, adding that the amount excludes a $1.7 million decrease related to self-insurance reserves.
“Notably, contract labor costs decreased by almost $500,000, or 12%, from the sequential quarter, resulting from our focus on hiring of key positions,” Leer said.
Management, operating revenues increase
Management and operating revenues for the company in the second quarter were approximately $39.7 million, an increase of $1.3 million from the first quarter, Leer said.
“Our residential segment reported total management and operating revenues of $25.1 million, an increase of approximately $750,000 from the first quarter,” he said, adding that management fees of $9 million were earned in the quarter.
General and administrative expenses for the second quarter were $17.8 million, including $3.3 million reimbursed by Diversified Healthcare Trust. “This G&A figure also included approximately $2 million related to non-recurring severance and consulting costs,” Leer said.
Net G&A expenses for the quarter were approximately $12.5 million, a decrease of $1.9 million, or 13.2%, from the first quarter, he said.
“Since the second quarter of 2021, we have reduced our quarterly net general administrative costs by $5.2 million, or approximately $21 million on an annualized basis,” Leer said. “While we continue to evaluate opportunities to reduce our general and administrative costs, we are committed to streamlining our processes and making the necessary investments in our people.”