Sunrise Closes Marriott Lease Deal, Terminates 10 Leases with Senior Housing REIT

On Dec. 29, 2011, Sunrise Senior Living, Inc. (NYSE:SRZ), Sunrise Senior Living Services, Inc., and Sunrise Continuing Care, LLC closed the transactions contemplated by an Agreement Regarding Leases with Marriott International, Inc. (NYSE:MAR), Marriott Senior Holding Co. and Marriott Magenta Holding Company, Inc. relating to a portfolio of 14 leases for senior living facilities, according to a Sunrise report.

These facilities are leased by SPTMRT Properties Trust as landlord to Sunrise Senior Living Services and Sunrise Continuing Care, and are guaranteed by Marriott pursuant to certain lease guarantees. All of the leases are set to expire on Dec. 31, 2013, and due to an existing agreement between the Sunrise parties and the Marriott parties, Sunrise Senior Living Services and Sunrise Continuing Care are not permitted to exercise their option under the leases to extend their terms for an additional five-year term unless Marriott is released from its obligations under the lease guarantees.

However, Marriott consented to the extensions of the terms for four out of the 14 leases for an additional five-year term, beginning on Jan. 1, 2014 and ending on Dec. 31, 2018. Sunrise provided Marriott with a letter of credit issued by Key Bank, NA with a face amount of $85 million to secure Marriott’s exposure under the lease guarantees for these four leases during the extension term and certain other obligations of Sunrise.

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During the extended five-year term, Sunrise will be required to pay Marriott an annual payment in respect of the cashflow of the four continuing lease facilities, subject to a $1 million annual minimum. Sunrise Senior Living Services and Sunrise Continuing Care have notified the landlord that the remaining 10 leases will terminate effective Dec. 31, 2013.

Senior Housing Properties Trust (NYSE:SNH) announced this notice of termination on Dec. 30, 2011. SNH says it believes Marriott declined to permit Sunrise to extend Marriott International’s guarantee obligations for 10 of the 14 communities, which led to it giving notices of termination for those 10 leases.

For the 12 months ended Sept. 30, 2011, the 10 communities were 87.4% occupied and produced cash flow coverage of SNH’s minimum rents for that same period of approximately 1.6 times on a weighted average basis. For these particular communities, rents received by the REIT during this time period were approximately $14.2 million (before percentage rent and straight line adjustments), SNH reported.

Sunrise offered to extend its leases for all 14 communities on their existing terms, but without a guarantee from Marriott International, and SNH declined this offer. Sunrise and SNH may continue to discuss leasing the 10 communities before the scheduled lease expirations at the end of 2013, but SNH says it can’t provide assurance that it will reach an agreement to continue to lease these communities to SUnrise on their current (or any) terms after Dec. 31, 2013.

Senior Housing Properties Trust believes the financial and other terms of the 10 leases for which Sunrise gave notice are “favorable to the tenants based upon current market conditions,” a spokesman for SNH explained, adding that Sunrise’s “current credit characteristics require changes in those terms to offset any loss of credit support provided by Marriott International’s guarantees to SNH.”

Written by Alyssa Gerace

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