Katie Potter hedshot

Editor’s Note: Read about the Senior Housing Properties Trust call with analysts to discuss the agreement here.

BREAKING NEWS — Five Star Senior Living and Senior Housing Properties Trust (SNH) will enter into new management agreements for 261 senior living communities that Five Star leases and operates as part of a restructuring deal to improve Five Star’s financial position, the Newton, MA-based organizations announced Tuesday morning.

SNH and its shareholders also will take an increased ownership stake in the company.

The modified business arrangement will be effective Jan. 1 and will have a 15-year term. Five Star will have the option of two five-year extensions, subject to the company maintaining portfolio financial performance.

The agreement, Five Star President and CEO Katie Potter said, “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.”

The company “expects its current financial position and near-term liquidity challenges will be immediately improved because of the transaction,” according to a news release.

“The transaction announced today provides an immediate and long-term solution to stabilize our largest operator and protect the value of our senior living communities,” SNH President and COO Jennifer Francis said. “In fact, we believe Five Star will be a healthy company at the end of this transaction.”

Under the agreement, which was unanimously approved by both the special board committees and the full boards of Five Star and SNH, the existing five master leases for 184 of SNH’s senior living communities (19,979 units) that are leased to Five Star, as well as the existing management agreements and pooling agreements with Five Star for 77 of SNH’s senior living communities (10,135 units), will be terminated and replaced with new management agreements.

Five Star also will issue common shares to SNH and its shareholders, resulting in their ownership of Five Star equal to approximately 34% and 51%, respectively, post-issuance. SNH’s current ownership stake is 8.3%.

“While Five Star is issuing a substantial ownership stake to SNH and SNH shareholders as part of this restructured business arrangement with SNH, we think it is in the best interest of Five Star, because this transaction provides both an immediate solution to Five Star’s liquidity challenges and provides a materially improved long-term financial outlook for Five Star,” Barbara Gilmore and Donna Fraiche, co-chairs of the special committee of Five Star’s Board of Directors, said in a statement.

The boards’ special committees and advisers had met for the past four months, according to John Harrington, chair of the special committee of SNH’s Board of Trustees.

“Some of the options we considered included evaluating whether we should engage new operators rather than Five Star to run some or all the communities as well as whether we should try to sell the entire portfolio,” he said. “We ultimately concluded for a variety of reasons that the transaction announced today was the best option for SNH and our shareholders in light of the difficult circumstances we faced.”

Also as part of the agreement:

  • Five Star’s aggregate monthly rent payable to SNH under the five master leases with Five Star was reduced from approximately $17.4 million to $11 million effective Feb. 1. Five Star has paid its February rent payment, which previously was deferred to March 31, at the reduced amount.
  • SNH has purchased from Five Star approximately $50 million of fixed assets and improvements related to the leased senior living communities.
  • SNH has provided a $25 million short-term revolving credit facility to Five Star that is secured by six of Five Star’s wholly owned senior living communities. Five Star will reduce its indebtedness under the SNH credit facility, and SNH will assume certain of Five Star’s liabilities and / or make a cash payment to Five Star equal to $75 million in aggregate.

Because of the lower cash flow from Five Star, the REIT expects to lower its common share distribution rate beginning with its next regularly scheduled quarterly distribution. SNH said it expects to pay an annual distribution of $0.55 to $0.65 per common share going forward.

To reduce leverage, SNH expects to sell up to $900 million in properties by the end of the year, focusing on underperforming senior living communities and non-healthcare related assets, including stand-alone skilled nursing facilities and wellness centers.

The REIT’s long-term strategy remains the same — expanding its medical office and life science buildings portfolio, Francis said.

“While our portfolio of senior living communities is expected to decrease as a percentage of our total property portfolio in the future, today’s announcement underscores our commitment to ensuring all of our properties are positioned for long-term success,” she added.

Editor’s Note: Read about the Senior Housing Properties Trust call with analysts to discuss the agreement here.

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