SNH CEO: Five Star Could Close, Sell ‘Problem Properties’

Five Star Senior Living (Nasdaq: FVE) may not own a huge number of properties, but at least a few stakeholders believe it might make sense for the provider to own even less real estate.

The company may want to consider selling or closing some of the struggling communities that it owns, according to David Hegarty, CEO of Senior Housing Properties Trust (Nasdaq: SNH). The Newton, Massachusetts-based real estate investment trust (REIT) owns 184 Five Star properties. Five Star itself owns 26.

The nation’s fourth-largest senior housing provider by resident capacity, Five Star saw its share price slide from over $5.00 in June 2015 to $1.76 a year later. As of market close on Nov. 4, shares were at $2.55. FVE had negative operating cash flow for nine months this year, and it missed analyst expectations for earnings and revenue in the third quarter.


However, its major REIT partner is not hitting the panic buttons.

“They had a rough quarter this quarter, but I think there are a lot of positive things that over time will get them back to cash flow positive on a regular basis,” Hegarty said Friday on a call with analysts. “But … they currently sit on about $50 million of cash and have [a] clearly available revolving credit facility of another $100 million, and they own about 26 properties, I believe, on their balance sheet.”

The fate of those owned properties has been under discussion for some time. Oklahoma-based senior housing owner and operator Senior Star, a Five Star shareholder, proposed buying FVE’s owned assets about a year ago, which at the time numbered 33. The sale would unlock value and improve Five Star’s strategic position,Senior Star argued. That offer was rejected. Now, Senior Star is seeking to increase its ownership stake in Five Star through a tender offer, which Five Star and SNH have been fending off.


The ongoing situation with Senior Star appears to be preventing Five Star from selling any real estate, one analyst said on Friday’s call.

But if Five Star wants to sell its owned assets, that is the company’s choice, said Hegarty.

“If you took out, say, the bottom 3% or 5% of their portfolio and closed them, sold them, whatever, their coverage ratios would materially improve,” he said. “So, it’s up to them to determine when to sell those properties or do something with them. They need our consent, obviously, but we are likely to consent to something like that. So, I think they could improve their results by eliminating some of their problem properties.”

Strategic Shifts, New Supply

While SNH did renegotiate management fees with Five Star this year, the REIT is not on the verge of a rent cut, Hegarty said. By continuing to adjust its strategy, Five Star should “be okay,” he added.

Part of that strategy is Five Star’s ongoing shift away from Medicare-reimbursed skilled nursing services toward private pay independent living and assisted living. This is important because changes to the U.S. health care system are creating headwinds for skilled nursing. In Florida, for example, managed care companies are increasingly sending patients directly from acute care to home health, bypassing SNF stays, Hegarty said.

Five Star also is tapping SNH for capital, which it is using to renovate properties. This should help drive rate increases and occupancy, Hegarty argued.

“You can turn to your residents and demonstrate that you spent the money,” he said. “Now, we are going to raise your rates 5%, 6%, 7% and it goes down a lot easier and in fact, we often find that census increases during the major construction projects because people become involved in what’s going on in the community … it actually benefits the community to see the construction going on.”

Five Star also needs to upgrade some properties to compete with significant new supply.

Both Five Star and Brookdale Senior Living (NYSE: BKD), another SNH tenant, reported significant new supply coming online in the third quarter, so it is not surprising that SNH corroborated the appearance of new competition.

During the last 12 months, about 33% of SNH properties either have seen new supply come online or new construction underway within a five-mile radius, Hegarty said.

Also this week, several senior housing deals were announced that involved new joint ventures. This is not something that SNH has seen much interest in, although Hegarty does not rule it out.

“I’m pleased to see that some of peers have broken through that and enticed some [JV] parties, so that might be in our future down the road,” he said.

For the third quarter of 2016, SNH’s normalized funds from operations of $0.45 per share missed analyst expectations by $0.01, and its revenue of $263.98 million missed expectations by $0.28 million. Its share price was down 1.8% in the late afternoon on Friday.

Written by Tim Mullaney

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