Editor’s Note: An earlier article about the agreement is posted here.

Senior Housing Properties Trust
President and COO Jennifer Francis

A new agreement between Five Star Senior Living and Senior Housing Properties Trust (SNH) that converts 261 communities from triple-net leases to a RIDEA structure and gives the real estate investment trust and its shareholders a greater ownership stake in the company improves Five Star’s financial position and is “the best possible solution” for the REIT and its shareholders, SNH President and COO Jennifer Francis said Tuesday.

“With this transaction, Five Star will become one of the more financially stable senior living operators in the country, with projected annual [earnings before interest, tax, depreciation and amortization] of $20 million to $30 million, minimal capital expenditure requirements, low leverage and continued direct ownership of 20 senior living communities, and as a result will be able to focus exclusively on operations and maximizing the performance of the communities,” she said during a call that came hours after both Five Star and SNH issued press releases about the new agreement.

Both organizations are based in Newton, MA.

In November, Five Star President and CEO Bruce Mackey revealed concerns that cash flow and liquidity issues at the company had raised “substantial doubt on our ability to continue as a going concern.” Tuesday, Francis said the financial problems with its major tenant were caused by the same factors that have been affecting other operators: “shorter lengths of stay caused by increased average age and acuity of residents, a growing number of alternatives to seniors housing, historic highs in inventory growth, a shortage of qualified employees, and wage pressure, all while the growth rate of the target age demographic has been in decline.”

Although Five Star’s efforts to address the issues were producing results, she said, SNH continued to see a decline in rent coverage, from 1.3 times in 2013 to approximately 0.9 times in 2018. Katie Potter succeeded Mackey in the role of president and CEO in December.

Special committees at Five Star and SNH have been in discussions for the past four months to arrive at the agreement announced Tuesday. In addition to the lease conversions — which will occur around Jan. 1 and have a 15-year term with the option of two five-year extensions for Five Star — SNH and its shareholders will be issued approximately 260 million common shares of Five Star stock to increase their combined ownership of Five Star to 85%.

During talks, one potential option discussed was allowing Five Star to go into bankruptcy and then moving its communities to another operator, Francis said.

“It’s important to note that Five Star was never in default of their leases and, therefore, we had no right to terminate them,” she said. “Had they defaulted, it would likely have been accompanied by their filing for bankruptcy protection.”

Although Five Star’s special committee “seriously considered” bankruptcy, Francis said, it was not in the best interest of the REIT or its shareholders.

“A Five Star bankruptcy would have resulted in SNH’s loss of control of the restructure process, and the long and difficult bankruptcy process would have undoubtedly led to a deterioration of operations,” she said. “We feared that such a deterioration would have been nearly impossible for another operator to recover from, and the value of our communities would have greatly suffered, as would our senior living residents.”

Under the new agreement, “SNH will benefit by our continued relationship with one single national manager, which, when combined with the RIDEA structure, creates efficiencies in asset management that cannot be obtained with multiple operating platforms across many states,” Francis said. “Expanding the RIDEA structure gives us greater control and oversight of the real estate. We can take a larger role in operations, and with our size and access to capital, we can invest in and improve our communities much more than Five Star could under the prior lease structure.”

The REIT plans to spend approximately $1,500 per unit on capital expenditures. SNH will build up its senior living asset management group to take on the larger asset management role, Francis said.

Five Star also expressed satisfaction with the agreement, with Potter stating in a press release that it “removes the cloud of uncertainty that has hung over Five Star recently and allows Five Star to continue delivering on its mission of providing an excellent resident and client experience across the enterprise.”

Read more details here.

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