Senior Housing Properties Trust (SNH) executives said Thursday that they are “really happy and confident” about moves being made at its largest tenant, Five Star Senior Living, under President and CEO Katherine “Katie” Potter, who began in the roles in January.
“We believe they are doing the right things to turn the business around, and it’s very much in line with our expectations so far,” Chief Financial Officer Richard Siedel said during the real estate investment trust’s second-quarter earnings call. “I don’t think I can stress enough how excited we are about things that Five Star is doing to turn the business around,” he added later.
A restructuring agreement announced in April and approved by Five Star’s board in June does have financial consequences for SNH and its shareholders, however, the REIT said. The reduction in rent paid to SNH by Five Star during the quarter, per the agreement, contributed to an 11.1% decrease in cash basis net operating income for properties owned and / or managed continuously by the same operator, as well as a net loss attributable to common shareholders of $37.2 million, or $0.16 per share.
But in addition to working to carry out the plan outlined in the restructuring agreement, Five Star has made changes to address workforce issues that SNH President and Chief Operating Officer Jennifer Francis said should “lead to even better services to residents and ultimately increased occupancy and rent growth.”
“Some of the biggest challenges in senior living are wage pressure across all employee types, and fierce competition for quality leadership. To address this, Five Star has increased its commitments to its team members, which we see as a much-needed strategic move,” she said. “Additionally, high employee turnover in the past led to the increased use of costly contract labor. Five Star hopes to eliminate third-party labor entirely and replace it with a higher-quality, permanent workforce.”
Five Star’s total wages and benefits were up 3.2% compared with the same period in 2018, Potter said on the company’s second-quarter earnings call Wednesday.
“Part of the commitment to retain and motivate our workforce includes recognition through compensation,” she said. “Accordingly, we invested in our team members through increases in base pay and are already benefiting from this investment through talented new hires.”
Nineteen new executive directors were hired at communities during the second quarter, Potter said Wednesday. “In addition, we hired a new director of employee engagement, completed our first comprehensive employee engagement survey, launched a new employee recognition program and are proceeding toward implementing a learning management system, all of which reaffirm our commitment to our team members,” she added.
“It’s a whole new team there, and we’re really encouraged by the progress we think they can make with that new senior management team,” she said.
The approval by Five Star’s board of the restructuring agreement was one of two hurdles that needed to be cleared before the Jan. 1 goal of converting management agreements for Five Star communities. The second hurdle, Francis said, is obtaining new licenses to transfer communities from triple-net leases to a RIDEA structure.
“With the triple-net lease structure, the operator is licensed in the communities, and with RIDEA structure, SNH will be licensed,” she said. “So we have a team of experts that are working on that licensing now, and I still feel confident that that we’ll hit that milestone as well and be able to have this transition happen at year-end.”
The contracts are written in such a way that they can be extended until Jan. 1, 2021, if necessary, Siedel said during the REIT’s first-quarter earnings call.
In other news, Francis said the REIT continues to make progress on its previously announced disposition plan and anticipates selling or having under agreement to sell approximately $900 million of senior housing and “noncore” medical office assets by the end of the year.
“Year to date, we have sold or have under agreement to sell 50 properties for total expected proceeds of $197 million, and we have another 60 properties being actively marketed for sale,” Francis said.