Five Star Senior Living Inc. Announces Second Quarter 2020 Results

Five Star Senior Living Inc. (Nasdaq: FVE) today announced its financial results for the quarter ended June 30, 2020.

Katherine Potter, President and Chief Executive Officer, made the following statement regarding the second quarter 2020 results:

“We are extremely proud of and encouraged by our team members’ perseverance and dedication during the quarter as the safety and well-being of our residents, clients and team members remains our number one priority. We made significant adjustments to address the unique challenges presented by the COVID-19 pandemic, while still focusing on achieving our strategic initiatives. We remain committed to adapting to these challenges and maintaining an exceptional resident experience that we believe is the key driver of our financial performance. We reported net income per share of $0.10 and adjusted EBITDA of $7.1 million in the second quarter of 2020. Our rehabilitation and wellness services division, Ageility Physical Therapy Solutions, or Ageility, continues to be a key area of growth, generating $19.3 million in revenues during the quarter representing a 5.6% increase over the prior year pro forma results, and Ageility's second quarter operating margins of 21.7% compared to prior year quarter pro forma margins of 10.1%.

Our balance sheet remains strong following the completion of our restructuring transaction with DHC at the beginning of this year, with $76.1 million of cash, $7.4 million of mortgage notes and no balance outstanding on our $65.0 million revolving credit facility as of June 30, 2020. We are well positioned to navigate the COVID-19 pandemic while focusing on the key pillars of our strategy: optimizing senior living operations, growing externally through complementary service offerings like our rehabilitation and wellness services and investing in our owned and leased communities.”

Overview and Results for the Quarter Ended June 30, 2020:

• The COVID-19 pandemic has had and continues to have a significant effect on FVE and the senior living industry as a whole. FVE's highest priority continues to be maintaining the health and well-being of its residents, clients and team members. As a result, FVE experienced an increase in direct costs to prepare for, prevent the spread of and respond to the COVID-19 pandemic, through purchasing personal protective equipment, testing supplies, disposable food supplies and professional services costs, as well as infectious disease prevention cleaning and sanitation costs in addition to increased labor costs. FVE incurs these costs for its owned and leased communities, rehabilitation and wellness services division and for its corporate operations, and those costs that relate to its managed senior living communities are incurred by Diversified Healthcare Trust, or DHC. FVE experienced a decline in occupancy and average monthly senior living revenue per available unit (RevPAR) throughout the quarter at the senior living communities it operates and manages. FVE also experienced the temporary closure of Ageility clinics for in-person services. The duration and extent of the effects of the COVID-19 pandemic remain unknown and the negative trends are expected to continue throughout the third quarter of 2020.

• FVE has taken a number of actions to support its team members, residents and communities, including the following:

• providing free meals to team members;

• providing COVID-19 emergency leave to team members, including paid leave to team members if they were exposed to or tested positive for COVID-19 and offering flexible work schedules;

• offering free COVID-19 testing to team members;

• recognizing and rewarding team members with bonuses in addition to FVE's total rewards package;

• promoting access to mental health services and other benefits to support team members' mental and physical well-being;

• hosting virtual all-hands meetings to communicate FVE's policies, procedures and guidelines related to COVID-19 response and re-opening efforts and to ensure team members are supported with assistance and guidance;

• implementing new virtual group activities for residents that allow for engagement while maintaining social distancing;

• expanding effective communication channels to residents and communities;

• providing devices and connectivity options for interaction with family members, virtual programming opportunities and distance learning; and

• focusing on learning and development opportunities.

• FVE has taken a number of actions to mitigate the effects of the COVID-19 pandemic, including the following:

• restricting access to senior living communities to essential visitors and team members, and only reopening communities when it is determined safe to do so in accordance with applicable federal, state and local regulations and guidelines, and FVE internal criteria;

• temporarily closing Ageility clinics for in-person services and only easing restrictions when it is determined safe to do so and in accordance with federal, state and local regulations;

• enhancing infectious disease prevention and control policies, procedures and protocols;

• providing additional and enhanced training to team members at all levels of the organization;

• working with vendors to provide adequate supplies and personal protective equipment to senior living communities and Ageility clinics;

• deferring the payment of $8.8 million of payroll taxes as permitted by the CARES Act, of which $1.7 million will not be reimbursable from DHC; and

• effectively transitioning to virtual sales and marketing activities and thoughtfully proceeding with resident move-ins, when appropriate.

• Combined senior living revenues and management fees for communities FVE leased from DHC prior to January 1, 2020, and since that date manages on behalf of DHC, for the quarter ended June 30, 2020 decreased to $35.3 million from $267.0 million for the same period in 2019, primarily due to the conversion of the formerly leased senior living communities to managed communities as a result of the Restructuring Transactions, as described in the Selected Pro Forma Condensed Consolidated Financial Information and Other Data in the Supplemental Information of this press release. Additionally, the decline in revenues as compared to the same period of the prior year are impacted by the sales of 15 communities in the third quarter of 2019 that FVE previously leased from DHC. Senior living revenues at communities FVE leased or owned continuously since April 1, 2019 was $19.5 million, which represents a $1.3 million or 6.0% decrease from the same period in 2019, primarily due to decreases in occupancy as a result of the COVID-19 pandemic. Revenues decreased $3.5 million compared to the June 30, 2019 pro forma results, which consider the financial results as if the Restructuring Transactions had closed on January 1, 2019, and is primarily attributable a decline in occupancy and RevPAR due to the COVID-19 pandemic.

• Rehabilitation and wellness services revenues for the second quarter of 2020 increased to $19.3 million from $11.5 million for the same period in 2019, primarily due to the impact of $6.7 million of inpatient clinic revenue at communities FVE previously leased from DHC during the second quarter of 2019, which was previously eliminated in consolidation accounting prior to the Restructuring Transactions, as well as the opening of 64 net new outpatient clinics. These increases were partially offset by revenue declines resulting from the reduction of in-person visits as a result of the COVID-19 pandemic. Revenues increased $1.0 million compared to the June 30, 2019 pro forma results, which consider the financial results as if the Restructuring Transactions had closed on January 1, 2019, and is primarily attributable to opening 64 net new clinics since July 1, 2019 offset by a decline in revenue as a result of the reduction of in-person visits due to the COVID-19 pandemic.

• The U.S. Department of Health and Human Services, or HHS, through the CARES Act Provider Relief Fund, distributed funds to healthcare providers to offset lost revenue and increased healthcare related costs associated with COVID-19. FVE received general distribution payments under the CARES Act related to rehabilitation and wellness services totaling $1.7 million and recognized $1.5 million in other operating income associated with these funds.

• Net income for the second quarter of 2020 was $3.0 million, or $0.10 per diluted share, compared to net income of $5.0 million, or $0.16 per diluted share, for the June 30, 2019 pro forma results.

• Earnings before interest, taxes, depreciation and amortization, or EBITDA, for the second quarter of 2020 was $5.0 million compared to $9.3 million for the June 30, 2019 pro forma results. Adjusted EBITDA, as described further below, was $7.1 million for the second quarter of 2020 compared to $9.8 million for the June 30, 2019 pro forma results. EBITDA and Adjusted EBITDA are non-GAAP financial measures. Reconciliations of net income determined in accordance with GAAP to EBITDA and Adjusted EBITDA for the quarters ended June 30, 2020 and 2019 are presented later in this press release.

• As of June 30, 2020, FVE had unrestricted cash and cash equivalents of $76.1 million, including $4.7 million of targeted skilled nursing facility (SNF) distribution funds under the CARES Act primarily related to SNFs that FVE previously leased from DHC during 2018 and 2019 for which FVE is evaluating its eligibility to retain those funds. In the event FVE determines it is are not eligible to retain the funds received, FVE will remit the funds to HHS by August 20, 2020. In addition, FVE had no amounts outstanding on its revolving credit facility and $7.4 million outstanding on a mortgage note.

Conference Call Information:

At 1:00 p.m. Eastern Time this afternoon, President and Chief Executive Officer, Katherine Potter, Executive Vice President, Chief Financial Officer and Treasurer, Jeffrey Leer, and Senior Vice President and Chief Operating Officer, Margaret Wigglesworth, will host a conference call to discuss FVE's second quarter 2020 results.

The conference call telephone number is (877) 329-4332. Participants calling from outside the United States and Canada should dial (412) 317-5436. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through 11:59 p.m. Eastern Time on Thursday, August 13, 2020. To hear the replay, dial (412) 317-0088. The replay pass code is 10145299.

A live audio webcast of the conference call will also be available in a listen-only mode on FVE’s website, www.fivestarseniorliving.com. Participants wanting to access the webcast should visit FVE’s website about five minutes before the call. The archived webcast will be available for replay on FVE’s website following the call for about a week. The transcription, recording and retransmission in any way of FVE's second quarter 2020 conference call are strictly prohibited without the prior written consent of FVE. FVE’s website is not incorporated as part of this press release.

About Five Star Senior Living Inc.:

FVE is a senior living and rehabilitation and wellness services company. As of June 30, 2020, FVE operated 265 senior living communities (30,660 living units) located in 32 states, including 241 communities (28,348 living units) that it managed and 24 communities (2,312 living units) that it owned or leased. FVE operates communities that include independent living, assisted living, continuing care retirement and skilled nursing communities. Additionally, FVE's rehabilitation and wellness services segment includes Ageility Physical Therapy SolutionsTM, or Ageility, a division of FVE, which provides rehabilitation and wellness services within FVE communities as well as to external customers. As of June 30, 2020, Ageility operated 206 outpatient rehabilitation clinics and 40 inpatient rehabilitation clinics. FVE is headquartered in Newton, Massachusetts.

Five Star Senior Living Inc.

Reconciliation of Non-GAAP Financial Measures

(dollars in thousands)

(unaudited)

Non-GAAP financial measures are financial measures that are not determined in accordance with GAAP. FVE believes the non-GAAP financial measures presented in the table below are meaningful supplemental disclosures because they may help investors better understand changes in FVE’s operating results and its ability to pay rent or service debt, make capital expenditures and expand its business. These non-GAAP financial measures may also help investors make comparisons between FVE and other companies on both a GAAP and non-GAAP basis. FVE believes that EBITDA and Adjusted EBITDA are meaningful financial measures that may help investors better understand its financial performance, including by allowing investors to compare FVE's performance between periods and to the performance of other companies. FVE management uses EBITDA and Adjusted EBITDA to evaluate FVE’s financial performance and compare FVE’s performance over time and to the performance of other companies. FVE calculates EBITDA and Adjusted EBITDA as shown below. These measures should not be considered as alternatives to net income (loss) or operating income (loss), as indicators of FVE’s operating performance or as measures of FVE’s liquidity. Also, EBITDA and Adjusted EBITDA as presented may not be comparable to similarly titled amounts calculated by other companies.

FVE believes that net income (loss) is the most directly comparable financial measure, determined according to GAAP, to FVE’s presentation of EBITDA and Adjusted EBITDA. The following table presents the reconciliation of these non-GAAP financial measures to net income (loss) for each of the three and six months ended June 30, 2020 and 2019.

(1) Costs incurred for the three months ended June 30, 2020 represent those related to a reduction in workforce.

(2) Represents costs incurred related to the settlement of a lawsuit and is included in other senior living operating expenses in our condensed consolidated statements of operations. The agreed upon settlement remains subject to a final definitive settlement agreement and to court and regulatory approvals.

(3) Represents the excess of the fair value of the Share Issuances of $97,899 compared to the consideration of $75,000 paid by DHC, as described in the Selected Pro Forma Condensed Consolidated Financial Information and Other Data in the Supplemental Information of this press release.

(4) Includes costs incurred related to the Restructuring Transactions as described in the Selected Pro Forma Condensed Consolidated Financial Information and Other Data in the Supplemental Information of this press release.

(1) The tables for the three months ended June 30, 2020 and 2019 include data for senior living communities and rehabilitation and wellness services clinics that FVE has continuously owned, continuously leased or continuously managed since April 1, 2019. The tables for the six months ended June 30, 2020 and 2019 include data for senior living communities and rehabilitation and wellness services clinics that FVE has continuously owned, continuously leased or continuously managed since January 1, 2019.

(1) Includes living units categorized as in service. As a result, the number of living units may vary from period to period for reasons other than the acquisition or disposition of senior living communities.

(2) RevPAR, or average monthly senior living revenue per available unit, is defined by FVE as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Data for the period ended December 31, 2019, excludes approximately $4,200 of deferred resident fees and deposits recognized due to the Restructuring Transactions.

(3) Senior living segment data for managed communities, other than FVE's management fees, represents financial data of communities we manage for the account of DHC and does not represent financial results of FVE. Managed communities data is included to provide supplemental information regarding the operating results and financial condition of the communities from which we earn management fees.

(4) Includes one active adult community with 168 units.

(5) Includes 2,186 skilled nursing units in communities where assisted living and independent living services are the predominant services provided.

(6) FVE did not manage skilled nursing facilities prior to January 1, 2020.

(7) Includes 53 assisted living and independent living units in communities where skilled nursing services are the predominant services provided.

(1) Includes data for senior living communities that FVE has continuously owned, continuously leased or continuously managed since April 1, 2019.

(2) Includes living units categorized as in service. As a result, the number of living units may vary from period to period for reasons other than the acquisition or sale of senior living communities.

(3) RevPAR is defined by FVE as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period.

(4) Senior living segment data for comparable managed communities represents financial data of communities we manage for the account of DHC and does not represent financial results of FVE. Managed communities data is included to provide supplemental information regarding the operating results and financial condition of the communities from which we earn management fees.

(1) Includes Ageility clinics and home health operations.

(2) Prior to the effective date of the Transaction Agreement (as defined below), revenue related to inpatient clinics at communities we previously leased from DHC was eliminated in consolidation pursuant to GAAP.

(1) AL is primarily an assisted living community and IL is primarily an independent living community.

(2) Encumbered property under our $65,000 revolving credit facility.

(3) Encumbered property under our $7,355 mortgage note.

Selected Pro Forma Condensed Consolidated Financial Information and Other Data

As previously announced, FVE entered into a transaction agreement, or the Transaction Agreement, with DHC to restructure our business arrangements pursuant to which, effective January 1, 2020:

• FVE’s then existing five master leases with DHC as well as FVE’s existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all of these senior living communities, together with a related omnibus agreement, the New Management Agreements;

• FVE issued 10,268,158 of its common shares to DHC and an aggregate of 16,118,849 of its common shares to DHC's shareholders of record as of December 13, 2019, or together, the Share Issuances; and

• as consideration for the Share Issuances, DHC provided to FVE $75.0 million by assuming certain of FVE's working capital liabilities and through cash payments. Such consideration, the New Management Agreements and the Share Issuances are collectively referred to as the Restructuring Transactions.

The following is a summary of selected financial and other data presented on a pro forma basis after giving effect to the completion of the Restructuring Transactions. The unaudited pro forma condensed consolidated statement of operations includes adjustments related to the Restructuring Transactions described above, and assumes that the Restructuring Transactions occurred as of January 1, 2019. In the opinion of management, all adjustments necessary to reflect the effects of the Restructuring Transactions have been included. The unaudited pro forma condensed consolidated statement of operations and the selected financial and other data are primarily based on, and should be read in conjunction with, FVE’s unaudited condensed consolidated financial statements and accompanying notes included in FVE’s Quarterly Report on Form 10-Q for the three months ended June 30, 2019.

The historical consolidated financial information for FVE included in the unaudited condensed consolidated pro forma statement of operations and selected financial and other data has been adjusted to give effect to pro forma events that are (1) directly attributable to the Restructuring Transactions, (2) factually supportable and (3) expected to have a continuing impact on FVE’s results of operations. The unaudited pro forma condensed consolidated statement of operations and pro forma selected financial and other data should be read in conjunction with the accompanying notes. The unaudited pro forma condensed consolidated statement of operations and other selected financial and other data are provided for informational purposes only.