29
WARNING CONCERNING FORWARD-LOOKING STATEMENTS
This presentation contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”,“expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our presentintent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this presentation relate to various aspects of our business, including our ability to operateour senior living communities profitably, our ability to grow revenues at the senior living communities we manage and to increase the fees we earn from managing senior living communities, our expectation to focus our expansionactivities on internal growth from our existing senior living communities and the ancillary services that we may provide, our ability to increase the number of senior living communities we operate and residents we serve, and to grow ourother sources of revenues, including rehabilitation and wellness services and other services we may provide, whether the aging U.S. population and increasing life spans of older adults will increase the demand for senior livingcommunities, health and wellness centers and other healthcare related properties and services, our ability to comply and to remain in compliance with applicable Medicare, Medicaid and other federal and state regulatory, rulemakingand rate setting requirements, our ability to access or raise debt or equity capital, our ability to sell communities we may offer for sale and other matters.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyondour control, such as the impact of conditions in the economy and the capital markets on us and our residents and other customers, competition within the senior living and other health and wellness related services businesses, olderadults delaying or forgoing moving into senior living communities or purchasing health and wellness services from us, increases in our labor costs or in costs we pay for goods and services, increases in tort and insurance liability costs,our operating leverage, actual and potential conflicts of interest with our related parties, changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing orproposed legislation or regulations, which could result in reduced Medicare or Medicaid rates or a failure of such rates to cover our costs or limit the scope or funding of either or both programs, or reductions in private insuranceutilization and coverage, delays or nonpayments of government payments to us, compliance with, and changes to, federal, state and local laws and regulations that could affect our services or impose requirements, costs andadministrative burdens that may reduce our ability to profitably operate our business, our exposure to litigation and regulatory and government proceedings due to the nature of our business, continued efforts by third party payers toreduce costs, and acts of terrorism, outbreaks of so-called pandemics or other manmade or natural disasters beyond our control. For example: (a) challenging conditions in the senior living industry continue to exist and our businessand operations remain subject to substantial risks, many of which are beyond our control; as a result, our operations may not be profitable in the future and we may realize losses; (b) we may not successfully execute our strategicgrowth initiatives, (c) we may not be able to successfully integrate, operate, compete and profitably manage our senior living communities; (d) we cannot be sure that we will enter additional management arrangements with DiversifiedHealthcare Trust (DHC); (e) our belief that the aging of the U.S. population and increasing life spans of older adults will increase demand for senior living communities and services may not be realized or may not result in increaseddemand for our services; (f) our investments in our workforce and continued focus on reducing our employee turnover level by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefitsmay not be successful and may not result in the benefits we expect to achieve through such investments; (g) our marketing initiatives may not succeed in increasing our occupancy and revenues, and they may cost more than anyincreased revenues they may generate; (h) our strategic investments to enhance efficiencies in and benefits from our purchasing of services may not be successful or generate the returns or savings we expect; (i) circumstances thatadversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening housing market conditions, higher levels of unemployment among our residents’ or potential residents’ familymembers, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally, could affect the revenues and profitability of our senior living communities; (j) residents who pay for our services withtheir private resources may become unable to afford our services, resulting in decreased occupancy and decreased revenues at our senior living communities; (k) the various federal and state government agencies that pay us for theservices we provide to some of our residents are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us; (l) we may be unable to repay or refinance our debt obligations when theybecome due; (m) certain aspects of our operations and future growth we may pursue in our business may require significant amounts of working cash and require us to make significant capital expenditures; accordingly, we may nothave sufficient cash liquidity, (n) the amount of available borrowings under our credit facility is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our credit facility;(o) the availability of borrowings under our credit facility is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy; (p) our actions and approach to managing our insurance costs maynot be successful and could result in our incurring significant costs and liabilities that we will be responsible for funding; (q) contingencies in any applicable acquisition or sale agreements we or DHC have entered into, or may enter into,may not be satisfied and our and DHC's applicable acquisitions or sales, and any related management arrangements we may expect to enter into, may not occur, may be delayed or the terms may change; (r) we may not be able to sellcommunities that we may seek to sell on terms acceptable to us or otherwise; (s) on September 30, 2019, we completed a one-for-ten reverse stock split of our outstanding common shares, as a result of which we regained compliancewith the listing standards of The Nasdaq Stock Market LLC (Nasdaq) for continued listing on Nasdaq; we may not maintain compliance with Nasdaq’s listing standards, and if we fail to maintain compliance, Nasdaq may initiateproceedings to delist our common shares; (t) the advantages we believe we may realize from our relationships with related parties may not materialize; and (u) operating deficiencies or a license revocation at one or more of our seniorliving communities may have an adverse impact on our ability to operate, obtain licenses for, or attract residents to, our other communities.
Our Annual Report on Form 10-K for the year ended December 31, 2019 and our other filings with the Securities and Exchange Commission (SEC) identify other important factors that could cause differences from our forward-lookingstatements. Our filings with the SEC are available on the SEC’s website at www.sec.gov. You should not place undue reliance upon our forward-looking statements. Except as required by law, we do not intend to update or change anyforward-looking statements as a result of new information, future events or otherwise.
Non-GAAP Financial Measures
This presentation contains non-GAAP financial measures including earnings before interest, income tax, depreciation and amortization (EBITDA) and Adjusted EBITDA. Reconciliations for these metrics to the closest U.S. generallyaccepted accounting principles (GAAP) metrics are included in an appendix hereto.
1Note: Data throughout this presentation is based on December 31, 2019 results, unless otherwise noted. Also, statements about the industry and demographics relate to the United States.
USHERING IN A NEW ERA
2
One of the largest managers of senior living units in the U.S.
Expected cash flow stability and healthy liquidity position following transformative net lease-to-management restructuring.
New management team with focus on operational excellence and an exceptional resident experience.
Quality portfolio mix with concentrated exposure to private pay independent living and assisted living communities.
Favorable long-term industry demographics and supply/demand trends.
Tuscany Villa of NaplesNaples, FL134 Units
Premier Residences of YonkersYonkers, NY310 Units
Premier Residences of Pompano BeachPompano Beach, FL169 Units
Company Overview
This presentation includes our trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery” and “Ageility Physical Therapy Solutions”, which are our property and are protected under applicable intellectual property laws. Solely for convenience, these trademarks referred to in this presentation may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks.
COMPLETED RESTRUCTURING TRANSACTIONS PROVIDES STABILITY AND A PATH TO GROWTH
4
Completed the restructuring of Five Star’s business arrangements with Diversified Healthcare Trust (DHC).
Entered into new management agreements to operate all senior living communities we leased from, and managed for the account of, DHC, as of December 31, 2019.
Financial restructuring immediately improved Five Star’s financial position and liquidity.
Highlights of New Management Agreements
A 15-year term commenced on January 1, 2020, with two, five-year extensions at Five Star’s option, subject to maintaining portfolio financial performance.
A base management fee of 5% of gross revenues at the community level and a 3% fee on capital projects managed by Five Star.
An incentive fee of 15% of annual property level EBITDA on a combined basis for the total portfolio in excess of a performance target, subject to a limit of up to 1.5% of portfolio gross annual revenues.
ACTIVE ACROSS THE SENIOR LIVING SPECTRUM(1)(2)
5
Independent Living (IL) Assisted Living (AL) Alzheimer’s (ALZ)/Memory Care
Continued Care Retirement Community (CCRC)
- Residents have a high degree of independence in large, private units.
- Daily meals, housekeeping and social activities are provided.
- One bedroom functional units with kitchenettes.
- Services include laundry, medication management and assistance with activities of daily living.
- Nursing care available.
- A dedicated, secure unit in assisted living or a stand alone community.
- Bridge to Rediscovery program.
- Accommodations for independent living, assisted living, and nursing care, offering a continuum of care.
- Healthcare units with intensive rehabilitation capabilities.
Managed(3): 10,747 Managed(3): 11,441 Managed(3): 3,281 Managed(3): 2,240
Owned: 564 Owned: 1,274 Owned: 270 Owned: -
Leased: - Leased(4): 177 Leased(4): 27 Leased: -
Total Living Units: 11,311 Total Living Units: 12,892 Total Living Units: 3,578 Total Living Units: 2,240
(1) Data presented as of March 2, 2020.(2) Excludes 1,264 free standing skilled nursing living units that are planned or under agreement for disposition.(3) Managed on behalf of Diversified Healthcare Trust (NASDAQ: DHC).(4) Leased from Healthpeak Properties Inc. (NYSE: PEAK)
IL/AL56%
CCRC 44%
IL/AL71%
CCRC 29%
Medicare6%
Medicaid4%
Private Pay90%
AL43%
IL38%
ALZ12%
CCRC7%
SCALED SENIOR LIVING OPERATOR WITH STRONG CONCENTRATION OF IL/AL, PRIVATE PAY MIX(1)
6
Operates and manages a total of 257 high quality senior living communities with 30,021(1) units across the U.S.
(1) Data is as of and for the period ended December 31, 2019.(2) Excludes 1,264 living units of free standing skilled nursing that are planned or under agreement for disposition.(3) Data excludes $13.6 million of revenue from Ageility physical therapy clinics.
Five Star owns 20 private pay communities with 2,108 units.
Owned and Leased Private Pay Revenues(2)
Owned and Leased Revenues(2)(3)Total Portfolio Revenues(2)(3)
Total Portfolio Breakdown By Units(2)
NATIONAL OPERATOR WITH SCALE AND DIVERSIFICATION
7
Operates and manages 30,021 units across 31 states(1)(2).
1,4985%
287
2,2668%
1,1504%
557
200
239
204
1,6726%
979
1,1114%
934
695116
1,025
434
188
187
1,092
991
MA – 123310
282
NJ – 1,037
DE – 988
MD – 1,2814%
1,6385%
1,9216%
1,6816%
FL – 4,61715%
All other states
Top 10 states (% concentration based on total units)
318
(1) Data is as of and for the period ended December 31, 2019.(2) Excludes 1,264 living units of free standing skilled nursing that are planned or under agreement for disposition.
(40)
(20)
-
20
40
60
80
100
120
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
2019Q1
2019Q2
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
Bps
Net Supply Growth (bps, Right Axis) Supply Growth (%, Left Axis) Absorption (%, Left Axis)
NIC Actuals
FAVORABLE LONG-TERM INDUSTRY DEMOGRAPHICS
8
On the cusp of an expected favorable supply-demand shift in senior living fundamentals
(1) Source: U.S. Census Bureau, “2014 National Population Projections”. (2) Source: NIC Map © Data Service, as of Q4 2019. For more information on the NIC MAP © Data
Service, please visit www.nic.org/NIC-map(3) Source: Centers for Medicare & Medicaid Services, www.cms.gov.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0
4
8
12
16
2015
2020
2025
2030
2035
Milli
ons
85+ Population Growth Rate (%)
Age 85+ Population Growth(1)
2019E – 2035E
Senior Living Supply-Demand Trends(2)
Compelling Long-Term Demographics• Senior living targeted demographic of 85+ population
is projected to grow over 30% in the next five years.• National healthcare spending is projected to grow at an
average rate of 5.7% per year and reach $6.0 trillion by 2027.(3)
Operating Environment Easing• Absorption outpaced Supply in 2019 for the first time
since the second quarter of 2016.• Combined with the favorable demographic outlook, we
believe the supply-demand imbalance that has persisted in recent history is shifting in favor of senior living.
NIC Forecast
$44 $39
$27 $35
$23 $12
($41)
$42
($60)
($40)
($20)
$0
$20
$40
$60
$80
FY12 FY13 FY 14 FY 15 FY 16 FY 17 FY 18 Pro FormaFY 19
HISTORICAL AND PRO FORMA ADJUSTED EBITDA POST TRANSACTION
9
1
(1) EBITDA and Adjusted EBITDA are non-GAAP measures. See financial appendix for a description of why we believe they are appropriate supplemental measures and a description of how we use these measures.
(2) See Financial Appendix for the calculation of EBITDA, Adjusted EBITDA and Pro forma EBITDA reconciliation of net income (loss) determined in accordance with GAAP to those amounts.
(3) Represents pro forma 4Q 2019 EBITDA multiplied by four to get full year 2019 pro forma EBITDA (which for such period is the same as pro from Adjusted EBITDA). See financial appendix for the calculation of Pro Forma EBITDA reconciliation of Pro Forma net income (loss) determined in accordance with GAAP to that amount.
Prior to 2020, Five Star’s relationship with DHC was largely structured as triple-net leases with monthly rent payments.
As a result of the transaction agreement entered into on April 1, 2019, rents were reduced by roughly $6.4M per month, starting February 1, 2019.
Reduced rent continued through the end of 2019 until the conversion from triple-net leases to management agreements on January 1, 2020.
Adjusted EBITDA(1)(2),
Five Star’s cash position immediately improved as a result of the transaction agreement, which stands at approximately $32M as of Q4 2019.
(3)
REFINED CAPITAL FUNDING PROGRAM
10
1
(1) Recurring capex is represented on an annual, per-bed basis. Annual DHC pro forma data is an estimated figure from Diversified Healthcare Trust (NASDAQ: DHC). FVE historical capex represents recurring capex spending from pre-restructuring owned and leased communities only.
Funding of capital improvements for DHC senior living assets now falls exclusively on DHC.
DHC has publicly disclosed an investment of $1,500/bed of recurring capital expenditure (“Capex”).
The investment in the assets should provide for an improved resident experience and a greater competitive positioning of Five Star’s portfolio of managed assets.
Historical Per Bed Recurring Capex, Pro Forma DHC Contribution(1)
$1,000
$1,096
$1,268 $1,323
$1,167
$1,500
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
$1,500
$1,600
2014 2015 2016 2017 2018 Annual DHCPro Forma
HEALTHY LONG-TERM LIQUIDITY OUTLOOK
11
Five Star’s financial position and near-term liquidity immediately improved as a result of the agreement to restructure its business arrangements with DHC.Key features achieved since 2019:
(1) The interest rate under this credit facility was approximately 6.0% per year on any drawn amounts and it matured and was terminated on January 1, 2020.
Financial restructuring immediately improved Five Star’s financial position and liquidity.
Beginning February 1, 2019, aggregate monthly rent payments reduced by approximately $6.4 million per month, until conversion on January 1, 2020.
Approximately $50 million of property, plant and equipment was sold to DHC as part of the restructuring transactions.
On June 12, 2019, Five Star secured a $65 million senior secured credit facility with an accordion feature that may increase maximum borrowing up to $165 million, due June 12, 2021.
Five Star entered a $25 million short-term revolving credit facility(1) provided by DHC that was secured by six owned senior living communities. This facility has since matured with no outstanding balance.
DHC provided to us $75 million of additional consideration in the form of the assumption of working capital liabilities.
Distributed approximately 26 million split-adjusted shares to DHC and DHC shareholders on January 1, 2020, in connection with the transactions outlined above.
Enterprise Initiatives
MANAGEMENT
13
Katie PotterPresident and Chief Executive OfficerMs. Potter is President and Chief Executive Officer of Five Star. Ms. Potter previously served as Executive Vice President and General Counsel since 2018, Senior Vice President and General Counsel since 2016, and Vice President and General Counsel since 2012. Prior to joining Five Star, Ms. Potter practiced law at Sullivan & Worcester LLP and Burns & Levinson LLP, where she focused on corporate law matters, including securities, mergers and acquisitions, corporate governance and other transactional matters.
Jeffrey LeerExecutive Vice President, Chief Financial Officer and TreasurerMr. Leer is Executive Vice President, Chief Financial Officer and Treasurer of Five Star. Prior to joining Five Star, Mr. Leer served as Chief Financial Officer and Treasurer of Office Properties Income Trust and he has been serving as Senior Vice President of The RMR Group LLC, where he has been responsible for the day to day oversight of the accounting and finance support functions of The RMR Group and its various affiliates. Prior to joining The RMR Group LLC, Mr. Leer held various accounting and finance positions at several multi-national Fortune 500 companies as well as the public accounting firm, Vitale, Caturano PC (predecessor to RSM US LLP). Mr. Leer is also a certified public accountant.
Margaret WigglesworthSenior Vice President and Chief Operating OfficerMs. Wigglesworth is Senior Vice President and Chief Operating Officer of Five Star. Ms. Wigglesworth has held various executive roles at large organizations over the past three decades where she was responsible for operations and change management. Prior to joining Five Star, Ms. Wigglesworth held positions at International Council of Shopping Centers, Cresa and Colliers International USA.
KEY INITIATVE: TEAM MEMBER ENGAGEMENT
14
A dedicated commitment to team members will continue to attract, inspire and retain a workforce that is dedicated to serving residents and clients.
Engagement Items Enterprise Returns
Increasing investment in training and development opportunities.2
Recognition through rewards and career advancement.3
Environment where employees are respected and valued.1
Elevated creativity, innovation and robust, interactive company-wide communications.2
Dedication to residents and clients. 3
Framework for a culture of higher standards and constant improvement.1
1
15
• Continued growth within the traditional senior living community market.
Orthopedic Rehab
Fitness / Wellness Program
Fall Prevention / Balance
Cognitive / Memory Enhancement
• Expansion into non-traditional markets like active adult communities providing new opportunities for accelerated growth.
• Evaluating the development of innovative fitness and personal training offerings targeting older adults.
• Currently operating 190 outpatient rehab clinics, a 48% increase in clinics year-over-year, with 41 clinics that are unaffiliated with Five Star.
• Produced $13.6 million dollars in revenues for the fourth quarter of 2019, up approximately 44% from the same quarter in the prior year.
• Ageility represents approximately 5% of Five Star’s revenues as of December 31, 2019.
2 KEY INITIATVE: AGEILITY PHYSICAL THERAPY SOLUTIONS
Data is as of and for the quarter ended December 31, 2019.
KEY INITIATIVE: OPERATIONAL EXCELLENCE
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3
Initiative:
J.D. Power Senior Living Certification Launched in 2018 to recognize contributions of senior living communities.
Five Star helped pilot the certification process.
Five Star communities were the first ever awarded the J.D. Power Senior Living Certification. As of December 31, 2019, there were 32 Five Star certified communities in eight states.
Work to deliver operational excellence consistent with best practices of the J.D. Power and Associates community certification criteria.
Add to the number of Five Star communities that have received this valued certification.
Defining Operational Segments Providing a consistent resident experience and creating cost efficiencies across each segment.
Providing a framework for decision making, allowing community leaders to allocate more time to residents, clients and team members.
Initiative: Introduce and implement how “operational segments” are defined.
Drive value by leveraging cost efficiencies and localizing best-practices.
KEY INITIATIVE: REVENUE MANAGEMENT
17
Initiative:
Revenue Management System
Enrollment of communities into Five Star’s revenue management program to be completed in Q1 2020.
Using RevPAR (Revenue per Available Room) as a measure of success.
The RevPAR Penetration Index (comparing Five Star’s RevPAR to that of the competition) is an indication of whether or not an advantage is achieved in a particular market faster than competition.
Continually refine the program to become more responsive to changes in the market.
Refined, systematic and centralized pricing, by combining internal sales and financial data with external market research.
Synthesizing occupancy with rate optimization combined with cost structure to achieve maximum profitability output.
4
KEY INITIATIVE: STRATEGIC SOURCING
18
Initiative:
Strategic Sourcing
Plan to achieve $8-$10 million annually of cost efficiency savings upon completion of roll-out of initiatives which is expected to take 9-12 months.
Designed to evaluate spend governance practices throughout the organization.
Evaluated potential benefits of streamlining sourcing opportunities within senior living operating costs.
Perceived benefits to changes in policy as well as process to enhance governance, tighten controls and improve vendor relationships.
5
STRATEGIC PARTNERSHIPS
19
MIT Agelab™
Access to insightful research. Network of potential strategic partners. Branding and differentiation opportunities.
Aging2.0™
Platform for Five Star to collaborate with other industry leaders in the services and related fields to address the biggest challenges and opportunities focused on the older adult demographic.
Strategic alignment across industries and related fields that will create an interdisciplinary, intergenerational and interactive ecosystem of innovative products and services for older adults.
National Senior Games™
Demonstrated affinity with wellness of older adults. Strategic positioning opportunities for both Five Star and Ageility.
Financial Appendix
21
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands) December 31, 2019
Assets
Cash and cash equivalents $ 31,740
Accounts receivable, net 34,190
Property and equipment, net 167,247
Other assets 112,616
Total Assets $ 345,793
Liabilities and Shareholders’ Equity
Revolving credit facility $ —
Mortgage notes 7,533
Total debt 7,533
Other Liabilities 218,279
Total Liabilities 225,812
Shareholders’ Equity 119,981
Total Liabilities and Shareholders’ Equity $ 345,793
22
Adjusted EBITDAThree Months Ended
December 31,Year Ended
December 31,2019 2018 2019 2018
Net income (loss) $ 16,105 $ (23,658) $ (19,995) $ (74,083)Add (less):Interest and other expense 419 1,245 2,615 3,018(Benefit) provision for income taxes (42) (27) 56 247Depreciation and amortization expense 2,716 8,965 16,640 35,939Interest, dividend and other income (379) (241) (1,364) (818)
EBITDA(1) 18,819 (13,716) (2,048) (35,697)Add (less):Long lived asset impairment 4 96 3,282 461Costs related to compliance assessment — — — (106)Severance, net — 756 393 756Employee litigation matter — — — 605Lease inducement(2) (12,423) — (12,423) —Deferred Resident Fees and Deposits(3) (4,242) — (4,242) —Transaction costs(4) 1,814 — 11,952 —Loss (gain) on sale of senior living communities 6 — 856 (7,131)
Adjusted EBITDA(1) $ 3,978 $ (12,864) $ (2,230) $ (41,112)(1) See Definitions of Certain Non-GAAP Financial Measures on page 28 for a definition of EBITDA and Adjusted EBITDA and a description of why we
believe they are appropriate supplemental measures.(2) Lease inducement related to the Rent Reduction recognized for the applicable period in 2019 as a result of the completion of the Restructuring
Transactions.(3) Deferred Resident Fees and Deposits related to senior living communities Five Star previously leased from DHC as a result of the completion of
the Restructuring Transactions.(4) Non-recurring costs incurred by Five Star in connection with the Restructuring Transactions.
(in thousands)
Three Months Ended December 31, 2019As Reported Restructuring Transactions Note Pro Forma
REVENUES:Senior living $ 263,705 $ (224,743) 2(a) $ 38,962Management fee 4,109 13,380 2(b) 17,489
Reimbursed costs incurred on behalf of managed communities 81,059 181,466 2(c) 262,525Total revenues 348,873 (29,897) 318,976OPERATING EXPENSES:
Senior living wages and benefits 137,666 (113,752) 2(d) 23,914Other senior living operating expenses 70,332 (63,482) 2(e) 6,850
Costs incurred on behalf of managed communities 81,059 181,466 2(c) 262,525Rent expense 20,513 (19,380) 2(f) 1,133General and administrative expenses 20,740 (6,492) 2(g) 14,248Depreciation and amortization expense 2,716 (6) 2,710Loss on sale of senior living communities 6 (6) —Long-lived asset impairment 4 (4) —
Total operating expenses 333,036 (21,656) 311,380
Operating income 15,837 (8,241) 7,596
Interest, dividend and other income 379 — 379Interest and other expense (419) — (419)Unrealized gain on equity investments 306 — 306
Realized gain on sale of debt and equity investments, net of tax 2 — 2
Income before income taxes and equity in earnings of an investee 16,105 (8,241) 7,864Benefit (provision) for income taxes 42 (2,066) 2(h) (2,024)
Equity (loss) in earnings of an investee, net of tax (42) — (42)Net income $ 16,105 $ (10,307) $ 5,798Add (less):
Interest and other expense 419 — 419Interest, dividend and other income (379) — (379)Provision for income taxes (42) 2,066 2,024Depreciation and amortization expense 2,716 (6) 2,710
EBITDA $ 18,819 $ (8,247) $ 10,572
Weighted average shares outstanding (basic) 5,002 26,387 2(i) 31,389Weighted average shares outstanding (diluted) 5,119 26,387 2(i) 31,506
Net income per share (basic) $ 3.22 $ 0.18Net income per share (diluted) $ 3.15 $ 0.18
23
PRO FORMA OPERATIONS
* See notes to the Pro Forma condensed consolidated statement of operations on pages 25, 26, and 27.
(dollars in thousands, except per share data)
24
NOTES ON PRO FORMA CONDENSEDCONSOLIDATED STATEMENT OF OPERATIONS (dollars in thousands)
Note 1. Basis of Presentation
The unaudited pro forma condensed consolidated statement of operations was derived from Five Star’s historical financial statements prepared in accordance with GAAP, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Five Star’s Annual Report on Form 10-K for the year ended December 31, 2019.
The unaudited pro forma condensed consolidated statement of operations is presented for informational purposes only and is not necessarily indicative of what Five Star’s expected results of operations would have been had the Restructuring Transactions described herein been completed as of the assumed dates, or of Five Star’s expected results of operations for any future period. Differences could result from many factors, including future changes in Five Star’s capital structure, operating expenses, revenues and cash flows.
Note 2. Pro Forma Restructuring Transactions Adjustments
The unaudited pro forma condensed consolidated statement of operations includes adjustments related to the Restructuring Transactions described herein, including the conversion of all of Five Star’s existing leases and management arrangements with DHC to the New Management Agreements and the Share Issuances.
Five Star’s historical consolidated financial information has been adjusted in the pro forma condensed consolidated financial statements to give effect to events that are (1) directly attributable to the Restructuring Transactions, (2) factually supportable and (3) expected to have a continuing impact on the results of operations.
Pro Forma Condensed Consolidated Statements of Operations
a. Senior living revenue
Adjustments to senior living revenue are comprised as follows: Three Months EndedDecember 31, 2019
Removal of senior living revenue due to the termination and conversion of the existing master leases to the New Management Agreements $ (229,316)
Previously eliminated intercompany revenue attributable to Ageility inpatient services provided at leased communities converted to managed under the New Management Agreements 4,573
Net adjustment to senior living revenue $ (224,743)
Revenues attributable to Ageility inpatient clinics at communities where Five Star leased and operated the business were previously considered to be intercompany revenues and hence were eliminated upon consolidation. Upon the consummation of the Restructuring Transactions, and consistent with the pre-existing managed communities, these revenues earned at these inpatient clinics will no longer constitute intercompany revenues and thus will not be eliminated in consolidation and will be recognized and reported as senior living revenue in Five Star's consolidated statements of operations.
25
NOTES ON PRO FORMA CONDENSEDCONSOLIDATED STATEMENT OF OPERATIONS
b. Management fee revenue
Adjustments to management fee revenue are comprised as follows:
c. Reimbursed costs incurred on behalf of managed communities and costs incurred on behalf of managed communities
Adjustments to both reimbursed costs incurred on behalf of managed communities and costs incurred on behalf of managed communities are related to the conversion of Five Star's master leases with DHC to the New Management Agreements, which provide for reimbursement for Five Star's direct costs and expenses related to such communities, inclusive of certain costs that are directly attributable to managing the communities, including personnel related costs.
d. Senior living wages and benefits
Adjustments to senior living wages and benefits are comprised as follows:
Three Months EndedDecember 31, 2019
Adjustment to increase management fee revenue for existing management agreements from 3% to 5% per the New Management Agreements
$ 1,607
5% management fee relating to the termination and conversion of the existing master leases to the New Management Agreements
11,466
3% construction management fee relating to the termination and conversion of the existing master leases to the New Management Agreements
519
Adjustment to remove of non-recurring costs associated with the Restructuring Transactions. $ (212)Net adjustment to management fee revenue $ 13,380
Three Months EndedDecember 31, 2019
Removal of senior living wages and benefits due to the termination and conversion of the existing master leases to the New Management Agreements $ (118,325)
Previously eliminated intercompany wages and benefits attributable to Ageility inpatient services provided at leased communities converted to managed 4,573
Net adjustment to senior living wages and benefits $ (113,752)
Wages and benefits attributable to Ageility inpatient clinics at communities where Five Star leased and operated the business were previously considered to be intercompany wages and benefits and hence were eliminated upon consolidation. Upon the consummation of the Restructuring Transactions these wages and benefits attributable to these inpatient clinics will no longer constitute intercompany wages and benefits and thus will not be eliminated in consolidation and will be recognized and reported as senior living wages and benefits in Five Star's consolidated statements of operations. These costs going forward will be included in reimbursed costs incurred on behalf of managed communities and costs incurred on behalf of managed communities. See (a) above for related revenue.
26
NOTES ON PRO FORMA CONDENSEDCONSOLIDATED STATEMENT OF OPERATIONS
e. Other senior living operating expenses
Adjustments to other senior living operating expenses are related to the conversion of all Five Star's leases with DHC to the New Management Agreements and include, but are not limited to, utilities, housekeeping, dietary, repairs and maintenance, insurance and community level administrative costs.
f. Rent expenseThe reduction to rent expense is for rent under the existing master leases converted to the New Management Agreements.
g. General and administrative expensesAdjustments to general and administrative expenses are comprised as follows:
h. Provision for income taxes
Adjustments to provision for income taxes reflect the income tax effect of the pro forma adjustments based on the estimated effective tax rate of approximately 26.0% for the three months ended December 31, 2019.
i. Weighted average shares outstanding - basic and dilutedThe increase in Five Star's basic and diluted weighted average shares outstanding is a result of the issuance of 10,268,158 and 16,118,849 Five Star common shares to DHC and to the applicable DHC shareholders, respectively, in connection with the completion of the Restructuring Transactions based on the number of Five Star common shares outstanding on December 31, 2019. Five Star's diluted weighted average shares outstanding is also impacted by the potentially dilutive restricted unvested common shares of 116,710 for the three months ended December 31, 2019. This diluted share impact is directly related to Five Star's 2014 Equity Compensation Plan and was originally excluded from the as reported numbers as to include them would be antidilutive.
Three Months EndedDecember 31, 2019
Adjustment of certain reimbursable costs to directly support managed communities $ (4,705)
Adjustment to remove non-recurring transaction costs we previously incurred relating to the Restructuring Transactions (1,814)
Increase in management fee to The RMR Group LLC due to increase in Ageility revenue 27
Net adjustment to general and administrative expenses $ (6,492)
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DEFINITIONS OF CERTAIN NON-GAAP FINANCIAL MEASURES
Non-GAAP Financial Measures
Non-GAAP financial measures are financial measures that are not determined in accordance with GAAP. Five Star believes thenon-GAAP financial measures presented in the table below are meaningful supplemental disclosures because they may helpinvestors gain a better understanding of changes in Five Star’s operating results and its ability to pay rent or service debt,make capital expenditures and expand its business. These non-GAAP financial measures also may help investors makecomparisons between Five Star and other companies on both a GAAP and a non-GAAP basis. Five Star believes that EBITDAand Adjusted EBITDA are meaningful financial measures that may help investors better understand its financial performance,including by allowing investors to compare Five Star’s performance between periods and to the performance of othercompanies. EBITDA and Adjusted EBITDA are used by management to evaluate Five Star’s financial performance andcompare Five Star’s performance over time and to the performance of other companies. Five Star calculates EBITDA andAdjusted EBITDA as shown on page 22. These measures should not be considered as alternatives to net income (loss) oroperating income (loss), as indicators of Five Star’s operating performance or as measures of Five Star’s liquidity. Also, EBITDAand Adjusted EBITDA as presented may not be comparable to similarly titled amounts calculated by other companies.
Five Star believes that net income (loss) is the most directly comparable financial measure, determined according to GAAP, toFive Star’s presentation of EBITDA and Adjusted EBITDA.
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