President and Chief Operating Officer Jennifer Francis

The COVID-19 pandemic has increased uncertainty and disruption in both the overall economy and the commercial real estate industry and has had a “profound” effect on business, resulting in an “extremely challenging operating environment,” Diversified Healthcare Trust and Five Star Senior Living executives said Thursday on second-quarter earnings calls.

Jennifer F. Francis, president and chief operating officer of Newton, MA-based real estate investment trust Diversified Healthcare, said COVID-19 took a toll on performance in the second quarter, as expected, with effects felt most strongly across the senior living portfolio.

As of July 31, 4.5% of the REIT’s resident population has tested positive for the coronavirus, but currently, only about 1.5% of residents have active positive cases. In the senior housing operating portfolio, 43% of residents who tested positive have since recovered. Francis said 50% of those cases are focused in seven states significantly affected by the virus: Florida, Georgia, Illinois, Maryland, New Jersey, South Carolina and Texas.

Five Star, of which DHC and its shareholders now own 85%, saw an increase in direct COVID-19 costs, including purchasing personal protective equipment, testing supplies, disposable food supplies and professional service costs, as well as infection prevention cleaning and sanitation costs, and increased labor costs. Five Star incurred these costs for its owned and leased communities, whereas Diversified Healthcare incurred costs related to senior living communities managed by Five Star.

Occupancy in the senior housing operating portfolio, with 241 senior living communities and 28,348 units, was 78.7% for the second quarter compared with 84.2% for the same quarter last year. Same-property occupancy for this segment was 78.9% for the quarter, compared with 85% in 2019.

“Due to restrictions intended to prevent the spread of COVID-19, including a decrease of in-person tours and limitations on non-essential visitors to our communities, like other senior living operators, Five Star is experiencing significant challenges in attracting new residents to our communities,” Francis said.

Five Star experienced a decline in occupancy and average monthly senior living revenue per available unit throughout the quarter at the senior living communities it operates and manages. Five Star Senior Vice President and COO Margaret Wigglesworth said the company analyzes pricing on a case-by-cases basis to optimize rates, but it is seeing rate pressures result from the pandemic.

“Competitors are offering concessions in areas more impacted by COVID-19 to attract new residents where move-ins are feasible,” she said, adding that comparable community revenue per available unit in its owned and leased portfolio is down 6% from the same period last year, and comparable community revenue per unit in its managed portfolio is down 5.7%.

But there is evidence of pent-up demand, executives said. With community move-ins restricted by active, confirmed COVID-19 cases, Five Star has been tracking its delayed sales leads and maintains contact with prospective residents while it evaluates the process to facilitate move-ins. 

“While we are optimistic about slowing occupancy declines with these measures as the pandemic runs its course, we continue to expect deterioration in occupancy in the near term,” Wigglesworth said.

Occupancy for Diversified Healthcare’s triple net leased senior living communities was 86.8% for the second quarter compared with 87.6% for the same quarter in 2019. The company granted several rent deferrals in its portfolio, including to one triple net senior living tenant.

“We’re interested in the success of our tenants’ business and continue to believe that partnering with our tenants that are experiencing financial challenges will provide support for their businesses and ultimately provide for greater assurances for collection in the long term, thus preserving our tenant relationships, retention and portfolio stability.”

DHC President and COO Jennifer Francis

“We’re interested in the success of our tenants’ business and continue to believe that partnering with our tenants that are experiencing financial challenges will provide support for their businesses and ultimately provide for greater assurances for collection in the long term, thus preserving our tenant relationships, retention and portfolio stability,” Francis said. 

Same-property wages and benefits in Diversified Healthcare’s SHOP portfolio were up 0.7% from the prior year, whereas second-quarter repair and maintenance costs were down 22%, food costs were down 9.2% and labor costs were down 17%. Despite substantial increases in supply costs related to PPE, same-property SHOP expenses were down $3.1 million (1.3%) year over year, driven by cost controls. 

Five Star saw combined senior living and management fees decrease to $35.3 million from $267 million for the same quarter in 2019, primarily due to the conversion of formerly leased communities to managed communities as a result of the restructuring. Five Star also saw a decline in revenues compared with the same period of the prior year impacted by the sales of 15 communities in the third quarter of 2019 that the company previously leased from Diversified Healthcare. Senior living revenues at communities Five Star leased or owned continuously since April 2019 were down $1.3 million or 6%, primarily due to occupancy decreases from COVID-19.

Although Five Star investment initiatives were affected by the pandemic, executives said the company still was able to make advancements in engagement and retention. As of June 30, Five Star recruited and hired 6,620 employees, including 35 new executive directors and five new regional directors.

Five Star said it supported employees by providing free meals, emergency leave, flexible work schedules and free testing. The company also said it recognized and rewarded employees with bonuses, promoted access to mental health services, and hosted virtual meetings to communicate policies, procedures and guidelines related to COVID-19 response and reopening efforts. 

Over the past two-and-a-half months, Five Star implemented community-wide baseline testing at every assisted living, memory care and skilled nursing community, partnering with other healthcare service providers to support the program. Every community with a confirmed coronavirus case conducts weekly testing for at least 14 days until no new cases are identified.

“The approach supports our ability to identify new cases, particularly in circumstances where those cases were asymptomatic, conduct contract tracing, and isolate positive cases significantly mitigates any spread of the virus,” Five Star President and CEO Katie Potter said. “We continue to monitor new advancements in testing, efficacy of new protocols and potentially pilot new approaches that show promise in improving our ability to proactively detect and prevent COVID-19 in our communities and clinics.”

See McKnight’s coverage of other earnings releases on Thursday: Capital Senior Living, Diversicare, The Ensign Group, National HealthCare Corp., Omega Healthcare Investors, Sabra Health Care REIT and Welltower.