Senior Housing Properties Trust is selling all of its stand-alone skilled nursing facilities as part of an “aggressive disposition plan” meant to reduce the real estate investment trust’s financial leverage and position it for the future, President and Chief Operating Officer Jennifer Francis told participants in the REIT’s first-quarter earnings call on Thursday.
“We are excited to improve SNH’s portfolio into one that will produce value, strong returns and growth for our shareholders as the demand in the U.S. for healthcare services and healthcare-related products grows,” she said.
As for senior housing, REIT executives believe the sector is “at or near the bottom, or skipping along the bottom,” Chief Financial Officer and Treasurer Richard Siedel said.
“We’re hopeful that as the demographics provide a bit of a tailwind, we should be in good shape” to capitalize on the market, he said.
SNH sold three skilled nursing buildings after the end of the first quarter, on May 1, and as of May 8 had 17 skilled nursing facilities under agreements to be sold.
“Some of these are really underperforming and struggling assets,” Francis said.
The REIT had a total of 38 skilled nursing facilities as of March 31. In the first quarter, according to SNH, skilled nursing facilities were responsible for 3% of the REIT’s net operating income. By comparison, senior living communities represented 46%; life science properties, 25%; medical office buildings, 23%; and wellness centers, 3%.
Five Star progress
Executives said Thursday that they agree with steps that its largest tennant, Five Star Senior Living, is taking to address workforce challenges and that they expect the real estate investment trust’s restructuring of leasing and management agreements with the company to be finalized as planned by Jan. 1, 2020.
“There’s a lot to do between now and then. There’s a lot of licensing that needs to take place, getting SNH licensed,” Francis said. “But I think that we feel pretty comfortable that it will go as expected.”
Siedel said that the contracts are written in such a way that they can be extended until Jan. 1, 2021, if necessary, “but we really expect it to go as expected on Jan. 1, 2020.”
Francis praised Five Star’s moves to address wage pressures and “fierce competition for quality leadership” through promotion and compensation, saying the “much-needed strategic move” is already producing noticeable effects.
Employee turnover at the operator was 35% in March, down from 68% a year ago and 57% in January, she noted.
“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,” Francis said. “We support Five Star’s investment and its workforce and believe this will lead to better services to residents and, ultimately, increased occupancy and rent growth.”
Salaries and wages in SNH’s managed senior living portfolio were up 3.2% on a same-property basis in the quarter, she said, contributing to a decrease in same-property cash-basis net operating income.
Five Star CEO Katie Potter, on the company’s Wednesday earnings call, said Five Star’s total wages and benefits were up 5.5% in the first quarter compared with the same period last year, in part due to increases in base pay. The company also hired 18 new executive directors for communities in the quarter, she said.
SNH’s same-property occupancy increased 50 basis points in the portfolio, Francis said, and residence fees and service revenue increased $1.3 million, or 1.2%, compared with the same quarter in 2018. Five Star has seen some growth in occupancy over the past three quarters, Siedel said.
Five Star also has been able to increase rates due to its revenue management system, he said.