Senior Star Blasts Five Star’s Cozy REIT Relationship

Senior Star is once again calling out the actions of Five Star Quality Care (Nasdaq: FVE), this time criticizing multiple elements of its close relationship with real estate investment trust (REIT) Senior Housing Properties Trust (Nasdaq: SNH).

Five Star Quality Care was once a 100% owned subsidiary of Senior Housing Properties Trust, which remains the senior housing provider’s largest shareholder. Both Newton, Massachusetts-based companies are also affiliated with holding company The RMR Group Inc. (Nasdaq: RMR).

Senior Star Management Company co-founders William F. Thomas and Robert D. Thomas, along with certain donor-advised charitable funds, collectively own about 6.8% of outstanding Five Star shares. Senior Star, a longtime owner and operator of senior living communities, currently manages 14 properties.

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Late last year, Senior Star publicly called for Five Star to sell its 33 owned assets for $325 million to Senior Star affiliate Gemini Properties as a means to unlock the company’s intrinsic value. 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.

In late June, Senior Housing Properties Trust entered into a $112.4 million sale-leaseback transaction with Five Star Quality Care for a portfolio of seven assisted living communities. Senior Housing Properties Trust also made changes to its management fee agreements for its properties managed by Five Star.

Encouragingly, this particular sale-leaseback transaction and the management fee changes signal that Five Star’s board of directors and management are moving away from the status quo, Tulsa, Oklahoma-based Senior Star wrote in a letter published July 25.

“However, as a shareholder, we must also recognize the long-term, potential value decay that accompanies their decision through the resulting increase in leverage and subsequent decrease in cash flow,” the letter said.

Senior Star questioned why Five Star neglected to borrow additional capital under its existing, low-rate $150 million line of credit, as well as why Five Star management decided not to sell the portfolio outright to “truly recapitalize and de-leverage the company.”

The relationship between Five Star and Senior Housing Properties Trust is inappropriate, Senior Star implied in the letter.

“A multitude of concerns should surround any governance structure that promotes long-term interdependency between closely held companies where the benefits to one party could be compromised for the benefit of another,” Senior Star wrote.

Senior Star inquired as to whether Five Star management conducted an independent, third-party sales process of the portfolio to guarantee the highest possible fair market value before closing the transaction with Senior Housing Properties Trust, and noted that the economics of the sale-leaseback transaction seem to benefit both RMR and Senior Housing Properties Trust.

“However, the benefits to Five Star appear much less attractive,” the letter said.

The establishment of a diversified board that is truly independent of both RMR and Senior Housing Properties Trust is critical to creating a leadership environment that supports strategic change, Senior Star said.

“We strongly believe that Five Star’s current corporate governance is the single greatest barrier preventing the company from achieving sustainable stockholder value,” the letter said, urging Five Star to nominate new board members who are truly independent of the company’s external manager and are prepared to make positive changes.

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

Written by Mary Kate Nelson

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