Five Star to Manage 10 SNH Properties After Sunrise’s Early Lease Termination

Senior Housing Properties Trust (NYSE:SNH) announced on Wednesday that it had entered into agreements for early terminations of leases for 10 senior living communities currently managed by Sunrise Senior Living (NYSE:SRZ). The senior housing REIT plans to lease the communities to its taxable REIT subsidiaries with Five Star Quality Care, Inc. (NYSE:FVE) as the new manager.

At the end of the fourth quarter, Sunrise told SNH it wouldn’t be renewing the 10 leases once the current terms ended on Dec. 31, 2013. Renewing the leases would have required approval from Marriott International, Inc. (NYSE:MAR), the guarantor of Sunrise’s lease obligations; Wednesday’s agreement accelerates the lease terminations and transfers operations from Sunrise to SNH’s taxable REIT subsidiaries (TRSs). The senior housing REIT will also purchase the inventory and certain improvements owned by Sunrise at these communities for $1 million.

“Because of the expected termination of Sunrise’s leases at year end 2013, SNH believes it is important for the community residents and for SNH that these operations be transferred to a manager with a longer term outlook as soon as possible,” said David Hegarty, President of SNH, in a statement.

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While he said that Sunrise has appeared to have made progress toward improving its financial condition since “accounting irregularities” were disclosed a few years ago, Hegarty pointed out that Sunrise remains in default of certain debts.

“In these circumstances and in the absence of continuing guarantees of Sunrise’s obligations from Marriott, SNH determined that it would be best for SNH if these operations were transferred to its TRSs and managed by a financially stable, high quality operator like Five Star,” he said.

In 2011, the 10 communities a combined average occupancy of approximately 87%, with combined gross revenues of about $115.6 million. The revenue came mostly from private-pay residents, rather than from Medicare or Medicaid.

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Sunrise has historically paid minimum rents of $13.5 million per year to SNH for these communities, plus percentage rents of approximately $2.8 million based on revenue increases at the communities. Net cash flow from operations in 2011 was approximately 1.5x the minimum rents due to the REIT.

The communities are located in Arizona, California, Florida, Illinois, Texas, and Virginia, for a total of nearly 2,500 units.

The new management contract between SNH and Five Star will be similar to previous contracts for other communities Five Star manages for SNH. The REIT landlord will pool all its contracts with Five Star, including those for the Vi Classic Residences, so it can determine incentive fees due to the operator.

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Sunrise will continue to lease four SNH-owned communities with 1,619 living units under leases running through Dec. 31, 2018, with obligations that will continue to be guaranteed by Marriott. In related news, the operator also announced on Wednesday it had agreed to pay Five Star $4 million to settle a previously disclosed litigation.

“We are pleased Sunrise will continue leasing and managing Bedford Court, Stratford Court of Boca Pointe, The Colonnades and The Jefferson,” said Mark Ordan, Sunrise’s chief executive officer, in a statement. “Retaining these strong communities and settling the long standing litigation are positive steps for Sunrise.”

Written by Alyssa Gerace

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