NEWTON, Mass. — Publicly traded REIT Seniors Housing Properties Trust (NASDAQ: SNH) and publicly traded operator Five Star Senior Living (NASDAQ: FVE) have restructured their business relationships regarding the 261 seniors housing properties owned by SNH and operated by FVE. Both companies are based in the Boston suburb of Newton.
Effective at the start of 2020, the five master leases currently governing the bulk of the portfolio — 184 properties totaling 19,979 units — will be converted to management agreements. The rest of the properties — 77 communities totaling 10,135 units — are already on management agreements.
At the same time as the conversion to management agreements occurs on Jan. 1, 2020, SNH shareholders will receive Five Star common shares, bringing the ownership stake of SNH and its shareholders to 85 percent of Five Star. SNH itself will own 34 percent of Five Star after this transaction.
Five Star’s stock price has struggled in recent years, falling from a five year high of $5.28 per share on May 30, 2014, to just 32 cents per share on Dec. 14, 2018. Stocks plunged this morning upon the announcement of the restructuring, opening at $1.05 per share and dropping to 80 cents per share as of 9:50 a.m.
SNH stock prices have been volatile in recent years, hitting a five-year high of $24.25 per share on June 20, 2014, and a low of $11.73 per share on Dec. 28, 2018. Overnight trading of SNH stock saw a sharp dip, from a close of $11.96 per share on Monday night to $9.52 per share this morning.
“We began this process by evaluating multiple options to address the impact that Five Star’s rapidly deteriorating financial position could have on our 261 Five Star-operated senior living communities, which represent a significant amount of our revenues and net operating income,” says 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. 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 restructuring, Five Star’s monthly rent under its master leases was reduced to $11 million from $17.4 million. Five Star had deferred February rent to March 31, and paid on time under the new rent level.
SNH also purchased $50 million of assets and improvements on the properties, while also providing a $25 million short-term revolving credit facility secured by six communities that Five Star owns in full.
As a result of all these changes, SNH plans to reduce its annual dividends from 65 cents per share to 55 cents per share. The company also plans to seek up to $900 million in property sales by the end of the year to reduce its leverage. The sales will focus on underperforming seniors housing communities.
“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,” says Jennifer Francis, president and chief operating officer of SNH. “In fact, we believe Five Star will be a healthy company at the end of this transaction, with projected annual EBITDA of $20 million to $30 million, minimal capital expenditure requirements, low leverage and continued direct ownership in 20 senior living communities.
“The transaction announced today also provides SNH with greater asset management oversight of its senior living portfolio going forward as well as positions SNH and SNH shareholders to realize possible financial upside in the future. Our long-term strategy remains unchanged, with a focus on growing our medical office and life science buildings portfolio.”
The SNH Board of Trustees and Five Star Board of Directors both unanimously approved the restructuring. The moves will not require shareholder approval, though the dispersal of Five Star stock will require approval by FVE shareholders.
Morgan Stanley is acting as exclusive financial advisor and Sullivan & Worcester LLP is acting as legal counsel to the special committee of SNH’s Board of in this transaction.
Citigroup Global Markets Inc. is acting as exclusive financial advisor and Ropes & Gray is acting as legal counsel to the special committee of Five Star’s Board of Directors.