Diversified Healthcare Trust to Transition 108 Communities From Five Star to Other Operators

Diversified Healthcare Trust (Nasdaq: DHC) has struck an agreement with Five Star Senior Living (NYSE: FVE) to transition 108 senior living communities to other operators by the end of 2021.

The senior living operator will also close and reposition the skilled nursing units in all of the continuing care retirement communities (CCRCs) it manages for Diversified, spanning about 1,500 units.

Both Newton, Massachusetts-based companies announced Friday they plan to amend their management arrangements, leaving Five Star with 144 senior living communities under management — 120 of which are with the real estate investment trust (REIT) . What remains represents about 66% of the current units and about 60% of the current management fee revenues in the Diversified portfolio.

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The RMR Group (Nasdaq: RMR), an alternative asset management company that is also headquartered in Newton, Massachusetts, provides management services to both Diversified and Five Star. As of Dec. 31, 2020, Diversified had 235 properties in its senior housing operating portfolio (SHOP) and 25 others under triple-net leases.

The 108 senior living communities set to be transitioned are some of the smaller ones in Five Star’s portfolio, spanning about 7,500 units and making up less than 12% of Five Star’s total management and operating revenues in 2020. The agreement will allow Five Star’s leaders to focus on growing and evolving the company’s larger senior living communities, standalone active adult and independent living communities, and its rehabilitation and wellness services, according to Five Star President and CEO Katie Potter.

“We believe that this shift in our focus is critical to the future success of Five Star and better positions us to expand our senior living management business and continue to diversify revenue sources in the future,” Potter said in a press release about the agreement. “More specifically, the implementation of this new strategic plan will showcase the operational strengths of Five Star to current and potential partners and customers in the future.”

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For Diversified, the move is aimed at improving the operating performance of the REIT’s senior housing operating portfolio, which carried an average occupancy rate of almost 71% as of Dec. 31, 2020.

The REIT expects to divide the 108 Five Star communities into smaller portfolios with new operators that have experience operating in certain regions, caring for higher-acuity residents and managing smaller communities, according to Jennifer Francis, president and COO of Diversified.

“We believe the transition of management of our 108 smaller communities to a diverse group of best in class operators will enhance their performance and we have already initiated discussions with many potential new operators,” Francis said in a press release. “We also expect that the results for the 120 communities that Five Star will continue to manage for DHC will improve because these communities are larger and service lower acuity residents, which are areas of operational strength for Five Star and where it plans [to] focus its business in the future.”

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Five Star wasn’t immediately available for comment, and a representative for Diversified declined to comment on the deal beyond the press release when reached by Senior Housing News.

Five Star’s remaining Diversified portfolio consists of some of the operator’s better-performing communities, with average occupancy 110 basis points higher than the other communities in the portfolio, according to Five Star.

Five Star plans to partially offset the loss of revenue by enacting expense reductions, and the operator expects to incur non-recurring restructuring costs of up to $5.5 million in connection with its new strategic plan.

Five Star and Diversified also agreed to change their management arrangements, extending the term of those agreements to December 31, 2036; eliminating the REIT’s right to sell up to $682 million worth of senior living communities and terminate Five Star’s management agreement without payment to Five Star a termination fee; limiting the cap on Five Star’s incentive fee; and modifying Diversified’s rights to terminate those agreements for performance-related reasons, among other provisions.

RMR Group will also under the agreement assume control of major renovation and repositioning activities at all Five Star-managed senior living communities.

This is not the first time Diversified and Five Star overhauled their business relationship in a big way. In 2019, Diversified — then doing business as Senior Housing Properties Trust — forged a major comprehensive lease restructuring and ownership agreement with Five Star aimed at easing the operator’s financial woes at the time.

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