Five Star Quality Care, Inc. (NYSE Amex: FVE) announced last week that it has entered a lease realignment agreement with Senior Housing Properties Trust (NYSE: SNH). The agreement is intended to assist SNH to obtain mortgage financing from Fannie Mae (NYSE: FNM), which is secured by certain properties owned by SNH and leased by FVE.  FVE owns or leases and operates 207 senior living facilities, two rehabilitation hospitals, outpatient rehabilitation clinics and institutional pharmacies.

As a result of this agreement, the total rents payable by FVE to SNH will be reduced by $2 million/year and SNH will pay FVE $18.6 million plus reimburse FVE for its out of pocket expenses incurred in connection with closing the transaction. This rent reduction and cash payment is intended to compensate FVE for realigning its leases with SNH, for the sale of certain personal property located at the mortgaged properties, for the pledge to FNM of certain assets owned by FVE, for the agreement by FVE to undertake certain reporting and operating requirements of FNM and for the issuance of 3,200,000 FVE common shares to SNH (approximately 9% of the total outstanding after this issuance).

Prior to the agreement announced today, FVE leased 183 properties from SNH (including 181 senior living facilities and two rehabilitation hospitals) pursuant to four combination leases. As a result of the agreement announced today, FVE will continue to lease the same 183 properties under four combination leases; however, the properties included in each lease have been reconfigured so that one lease includes only the 28 senior living communities which are being mortgaged by SNH with FNM.

FNM mortgage terms require that substantially all tangible and intangible personal property located at, or arising from the operations of, the mortgaged properties be pledged to secure the FNM loan. Some of the tangible personal property located at the properties being mortgage financed by FNM is being acquired by SNH from FVE and pledged to FNM. Most of the intangible personal property arising from the operations of the mortgaged properties (e.g. accounts receivable and contract rights) belong to FVE and will be pledged to secure the FNM mortgage. Also, FNM has reporting, ownership structure, operating and other requirements relating to the mortgaged properties which are different from FVE’s current reporting, structure, operating and other requirements, but FVE has agreed to undertake the FNM requirements in connection with the agreement.

The sale of FVE common shares to SNH was included in this agreement, in part, to compensate FVE for the intangible loss of liquidity resulting from FVE’s pledge of certain assets to FNM and, in part, so SNH may participate as a shareholder of FVE in the benefits which FVE may realize under the agreement. The agreement also provides that SNH will have certain registration rights with regard to the 3,200,000 FVE shares which it acquired; however, SNH’s sales of these shares are restricted when a sale would jeopardize certain FVE tax attributes and SNH has stated that it has no present intention to sell these shares.

FVE was formerly a 100% owned subsidiary of SNH which became a separate public company as a result of a spin off transaction in 2001.