Senior Housing Properties Trust President and COO Jennifer Francis

Real estate investment trust Senior Housing Properties Trust (SNH) is on track to have $900 million in assets sold or under agreement to be sold by the end of the year, President and Chief Operating Officer Jennifer Francis said Thursday.

The previously announced goal is designed to reduce leverage and position the REIT for the future.

“There is abundant capital in the medical office, life science and senior living acquisitions markets, and we continue to feel comfortable that our pricing and timing goals are achievable,” Francis said on the REIT’s third-quarter earnings call.

SNH now has assets valued at more than $740 million either sold, under agreement to be sold or with offers received and is actively marketing the remainder of its disposition portfolio, valued at more than $240 million, Francis said.

Of the senior living properties being sold, approximately 45% of buyers have been regional or national operators, she said. “Another 30% of the pool are private equity, and then its breaks down into smaller chunks from there. The next-biggest interested buyer is REITs,” Francis said.

‘Disruptors’ affect Five Star workforce plans

The disposition plans, 60% of which involved senior living assets, were among the “disruptors” that led Five Star Senior Living to become “very focused” on recruiting and retaining high-quality employees, she said, adding that those workforce efforts should continue “well into 2020.” The company leases or manages SNH communities.

“We didn’t publicly announce specifically what assets were being sold, so that caused employee disruption,” Francis said. “Five Star had to pay costly overtime and contract labor as a result of that.”

Another source of Five Star employee uncertainty was “the doubt that existed about their ability to continue as a going concern,” she said. “That’s been solved, so that issue has gone away.”

C-suite changes at Five Star also caused employee uncertainty, Francis said. CEO Bruce Mackey and Senior VP of Senior Living Operations Scott Herzig departed the company in December. A new chief financial officer, Jeffrey Leer, began in June, and a new chief operating officer, Margaret Wigglesworth, was announced in August

Additionally, Francis said, new Five Star CEO Katie Potter’s desire to build a corporate “culture of accountability, transparency and innovation … caused some disruption, because I think there were some employees who decided to leave because they didn’t want to work in that environment of accountability.”

But macro issues also are in play, she said. “Unemployment hasn’t been this low since 1969, and the senior living industry has been especially challenged,” Francis said. “And operators are obviously competing extremely fiercely for qualified employees.”

As a result, total wages and benefits for Five Star increased $5 million, or 3.5%, compared to the same period last year, Five Star executives reported on their Wednesday earnings call. Wages and benefits in the quarter were $147 million, which represented approximately 54% of senior living revenue.

SNH supports Potter’s moves as “essential ahead of the conversion of our leased communities to managed,” Francis said, and they should “lead to even better service to our residents and, ultimately, increased occupancy and rent growth.”

Stats for the quarter

SNH reported a 14.9% decrease in consolidated same-property cash basis net operating income in the third quarter compared with the same quarter of 2018.

“This decrease was expected and was primarily the result of the reduction in Five Star’s rent for the full quarter as agreed upon in the April transaction,” Francis said.

Including the triple-net leased senior living communities, same-property cash-basis NOI was down 4.4% compared with the same quarter in 2018.

“This decrease was mainly the result of a $3.9 million, or 17.5%, same-property NOI decline in our managed senior living portfolio,” she said, adding that the decrease was driven by a combination of the workforce investment initiatives within the managed senior living portfolio, a 140-basis point drop in same-property occupancy in the managed senior living portfolio compared with the prior year, and several non-recurring expenses.

Increased wages and benefits and contract labor accounted to $2.2 million of the year-over-year decrease in NOI, Francis said.

Restructuring on track, too

Francis reiterated what Five Star’s Potter had said the day before on that company’s own third-quarter earnings call — that the restructuring of the REIT’s relationship with the company is “on track and progressing as planned.” The modified business arrangement to improve Five Star’s financial position will be effective Jan. 1 and will have a 15-year term.

The terms of the deal, announced in April, call for existing master leases for SNH senior living communities leased to Five Star, as well as the existing management agreements and pooling agreements with Five Star for SNH senior living communities, to 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 ownership stake at the time of the announcement was 8.3%.

“With Five Star shareholders approving the issuance of Five Star common stock to SNH and SNH shareholders, our only remaining milestone is obtaining the requisite licenses from the states in which our assets are located, a process which is well underway and on schedule,” Francis said.