SNH Acquires 7-Property Five Star Assisted Living Portfolio

Real estate investment trust Senior Housing Properties Trust (NYSE: SNH) has executed a $112.4 million sale-leaseback with Five Star Quality Care (NYSE: FVE) for a portfolio of seven assisted living communities, the two companies announced Wednesday.

SNH also has amended its agreements over management fees for communities in the REIT’s portfolio that are managed by Five Star.

The communities in the sale-leaseback encompass 545 units and are located in four states: three are in North Carolina, two are in South Carolina, one is in Tennessee, and one is in Virginia. SNH funded the transaction with cash on hand and drawings from a $1 billion unsecured revolving credit facility.

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The properties all are high-quality, private pay assets with solid rent coverage, SNH President and COO David Hegarty said in a prepared statement.

Under the lease terms, Five Star initially will pay $8.4 million a year in rent. 

The net sale price realized on the portfolio transaction will be $81.8 million in excess of net book value, Five Star stated. It will use proceeds for general business purposes and to repay in full a secured revolving credit facility that had $60 million outstanding as of June 28.

Following the transaction, Five Star will own 26 senior living communities. It manages 63 in the SNH portfolio. Overall, the Newton, Massachusetts-based company owns, leases, or manages nearly 275 communities, making it one of the largest senior living operators in the nation.

Simultaneously with the portfolio transaction, the two companies amended their agreements over management fees. Effective July 1, 2016, this will change the way FVE’s management fees are calculated.

“The change in the formulas for calculating these management fees is not expected to have a material impact upon SNH’s earnings from the managed communities, but SNH believes that the revised fee formulas may create incentives for improved performance by Five Star in the future,” Senior Housing Properties Trust stated in a press release.

Most significantly, for 17 communities that Five Star commenced managing after May 1, 2015, the fees now will change from 3% of gross revenues and 35% of net operating income that exceeds threshold amounts to 5% of gross revenues and 20% of net operating income that exceeds threshold amounts.

“This transaction allows us to recognize and utilize a portion of the value of Five Star’s owned real estate to improve our financial position while preserving the properties’ operating economics within our portfolio,” said Bruce Mackey, President and CEO of Five Star, in a prepared statement. “Additionally, the amendments to our management arrangements with SNH will increase management fee revenue from certain managed communities.”

In the spring, Five Star came under pressure from activist shareholder Senior Star.

Senior Star argued that Five Star should sell its portfolio of owned properties and focus on investing in its leased properties as a way of unlocking value after underperforming against industry peers Brookdale Senior Living (NYSE: BKD) and Capital Senior Living (NYSE: CSU). 

Mackey and other Five Star leaders rejected the argument, saying the company’s owned assets are not for sale.

The relationship between Five Star and SNH is close, given that FVE used to be a 100% owned subsidiary of the REIT, which still is the largest shareholder of the provider. Both companies are affiliated with holding company The RMR Group Inc. (Nasdaq: RMR). Along with other RMR companies, Five Star and SNH are in the process of transferring from the New York Stock Exchange to the Nasdaq, RMR announced earlier this month. 

Written by Tim Mullaney

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