[Update] Senior Star Intensifies Push for Five Star to Sell Portfolio

Senior Star has doubled down on its calls for Five Star Quality Care Inc. (NYSE: FVE) to sell its 33 owned assets for $325 million as a means to unlock the company’s intrinsic value.

On March 1, Tulsa, Oklahoma-based Senior Star issued a 7-page letter of concern to other Five Star shareholders regarding this issue. Senior Star Management Company co-founders William F. Thomas and Robert D. Thomas, along with certain donor-advised charitable funds, collectively own nearly 7% of outstanding Five Star shares.

Senior Star presents a lengthy argument for why Five Star should sell its owned properties, calling into question some of the assertions and decisions made by Five Star leadership, and prompting shareholders to press Five Star management on their long-term strategy.

Senior Star first publicly called for the sale of Five Star’s owned assets to Gemini Properties—a Senior Star affiliate—in December 2015. Five Star responded by saying its owned assets are not for sale, adding that focusing on improving earnings was the best way to improve the trading value of Five Star’s securities.

Despite Five Star’s initial response, Senior Star continues to believe that long-term, material value exists within Five Star, and that it is attainable only through a major change in the strategic direction of the company, the most recent letter states.

“If Five Star acts purposefully to fully maximize its long-term earnings, it has the potential to become a best-in-class manager both operationally and financially, delivering significant value to shareholders,” the letter says.

Despite favorable industry dynamics and a geographically diversified, attractive portfolio, Five Star has consistently underperformed, the letter says. It includes a comparison of shareholder returns, showing Five Star’s have been below peer companies Brookdale Senior Living (NYSE: BKD) and Capital Senior Living (NYSE: CSU).

A leading factor in Five Star’s underperformance is its “conservative” approach to capital investment, Senior Star says.

To better position itself, Five Star’s main strategy should be investing in its leased communities to create competitive advantages, thereby boosting occupancy and rate growth, Senior Star says in the letter.

The best way for Five Star to raise the capital to invest in its leased properties is to sell its owned properties, Senior Star explains.

And although Five Star Managing Director Barry Portnoy indicated to Senior Star that Five Star had easy access to more capital through additional debt financing and the public equity markets, Senior Star disagrees.

Debt financing is a poor option, due to Five Star already being highly leveraged, and tapping the equity markets by issuing new stock would only further dilute the value of shares that already are not providing good returns to shareholders.

“We believe Five Star must take significant action to improve its performance, and a sale of its owned assets provides the capital to pursue such a strategy without negatively impacting shareholders,” the letter says.

In addition to investing in its properties, Senior Star says Five Star could use the capital from a sale to de-leverage its leases, which also would give its primary landlord—Senior Housing Properties Trust (NYSE: SNH)—capital to work with.

Additionally, Five Star could use the capital to accelerate its pipeline of accretive expansion projects, such as building more units or converting current units to memory care, the letter says.

Senior Star expects more operators will take an “asset-light strategy” as the market continues to evolve, following the successful examples of Holiday Retirement, Elmcroft Senior Living, Atria Senior Living and others.

The letter concludes by encouraging additional Five Star shareholders to contact Five Star’s management to discuss the company’s strategic plan for cash flow generation and sustainability, as well as growth potential.

Senior Star, a longtime owner and operator of senior living communities, currently manages 14 properties. Five Star, meanwhile, is the fourth-largest operator of senior living communities in the United States, operating 274 in 32 states.

A representative from Five Star told Senior Housing News the company had no formal comment to offer at this time.

Five Star President and CEO Bruce Mackey addressed the letters from Senior Star during the company’s earnings call on March 2. Five Star’s interests align with those of its shareholders, he assured investors.

“I own about 1.5% of the company, I think our interests are aligned with the shareholders,” Mackey said, adding that the company is unhappy with where the stock is right now.

Mackey also expressed optimism for the future of the company—including its share prices.

“Is it going to turn around in the next quarter? Likely not,” he said. “But I think long-term this is a great company, this is a great industry, and we feel that we are well-poised to take advantage of it in the future.”

The company reported a net loss for the fourth quarter of 2015 of $6.4 million, or $0.13 per share, compared with a net loss of $73.7 million, or $1.53 per share, for the year-ago period.

Net loss for fiscal year 2015, meanwhile, was $43.1 million, or $0.89 per share, compared with a net loss of $85.4 million, or $1.78 per share, for fiscal year 2014.

Five Star also reported an increase in fourth quarter revenue year-over-year, from $332.5 million in 2014 to $344.6 million in 2015—beating analysts’ expectations by $1.92 million.

Written by Mary Kate Nelson