Senior Housing Properties Trust Looks to Shed SNFs in $900M Sell-Off

Amid a major restructuring with one of its primary tenants, Senior Housing Properties Trust (NYSE: SNH) is looking to shed up to $900 million worth of its assets — with standalone skilled nursing facilities in the crosshairs.

The Newton, Mass.-based real estate investment trust (REIT) earlier this week announced a overhaul of its longstanding relationship with Five Star Senior Living (Nasdaq: FVE), a chain of 261 senior living and skilled nursing facilities also based in Newton.

Under the terms of the deal, landlord Senior Housing Properties Trust will terminate its master leases and management agreements with Five Star, replacing them with new RIDEA arrangements to take effect in 2020. The transaction also saw Five Star sell Senior Housing Properties Trust $50 million worth of property and equipment, with the REIT set to expand its ownership of Five Star from 8% to 34% by New Year’s Day.

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“Expanding the RIDEA structure gives us greater control and oversight of the real estate,” Senior Housing Properties Trust president and COO Jennifer Francis said during a Tuesday morning call with investors and analysts. “We can take a larger role in operations and, with our size and access to capital, we can invest in and improve our communities much more than Five Star could under the prior lease structure.”

The changes afoot between the Newton senior living and care companies also include a continued shift away from standalone skilled nursing facilities. The REIT announced its intention to dispose of up to $900 million in properties by the end of the year, including SNFs not associated with its continuing care retirement communities (CCRCs) — as well as select senior living campuses and other non-core assets such as medical office buildings and wellness centers.

About 20 of Senior Housing Property Trust’s standalone skilled facilities either under contract or “close” to a sale agreement, chief financial Rick Siedel said on the Tuesday call; the REIT reported 38 total SNFs in its portfolio as of the end of last year. Five Star had 29 leased SNFs as of December 31, with occupancy of 76.3%.

“There are still some skilled units in the CCRCs, which are pretty important components of those assets. But the Five Star team is regularly doing highest and best use analysis to try to figure out how we can maximize revenue and profitability at each property,” Siedel said. “So I think the skilled component is always going to be a mix, but we are continuing to reduce our exposure to the standalone skilled nursing facilities.”

Five Star’s 29 SNFs had 2,505 beds as of the end of last year, with an additional 4,732 beds across its portfolio of senior living communities.

Standalone skilled nursing facilities only account for about 3% of total revenue, Siedel said, with that number climbing to 20% of revenue from leased CCRCs.

“Historically, the occupancy in those units have trailed the rest of the portfolio,” he said. “So I don’t think it’s a disproportionate amount of revenue, but it’s something that the team is actively working on.”

Five Star’s struggles have been well documented in recent years, with the company losing $74.1 million in 2018 and officials raising doubts about its future.

“We cannot be sure that there will be any changes to our agreements to SNH, or whether Five Star will be able to continue as a going concern,” CEO Katherine Potter said last month on the company’s fourth quarter 2018 earnings call.

She was more upbeat in a statement announcing the overhaul.

“I am also pleased that today’s announcement removes the cloud of uncertainty that has hung over Five Star recently,” Potter said. “I look forward to leading a financially strong Five Star, working to evolve our business to meet the rapidly changing preferences of older adults and repositioning Five Star as an industry leader.”

Potter had replaced former CEO Bruce Mackey as of January 1, rising from executive vice president and general counsel.

The move came a few months after Five Star received a delisting warning from the Nasdaq exchange after its stock price remained below $1 per share for 30 consecutive trading days. Under the terms of the warning, Five Star has until April 22 to turn in a 10-day stretch at or above $1 per common share to regain compliance; FVE stock opened Wednesday’s trading at $0.59 per share, and have only spent a handful of days above the $1 threshold this year.

Senior Housing Property Trust’s move away from standalone SNFs comes at a time when many senior living operators have been forced to reckon with the future of skilled nursing within their portfolios. The Avamere Family of Companies, for instance, has launched a “micro-CCRC” concept that does not include skilled nursing under its Ovation by Avamere brand, and Fitch Ratings has used long-term care headwinds to raise the specter of potential credit issues for CCRC operators down the road.

Commercial real estate firm CBRE summarized the trend in a report released last summer.

“Demand has been falling for a variety of reasons, including healthier seniors, shorter time spent in nursing care due to changes in Medicare and Medicaid reimbursement policies, and more care being provided in non-nursing care seniors living, especially in assisted living,” CBRE noted. “Telemedicine and other technological advances in the delivery of health care are keeping seniors with significant health-care needs in non-nursing care environments longer.”

Francis echoed some of those same themes in her opening comments to investors and analysts Tuesday.

“Over the past three or four years, we have seen a combination of shorter lengths of stay caused by increased average age and acuity of residents, a growing number of alternatives to senior housing, historic highs of inventory growth, a shortage of qualified employees, and wage pressure — all while the growth rate of the target age demographic has been in decline,” she said.

But according to RBC Capital Markets director Michael Carroll, Senior Housing Properties Trust’s move was more indicative of long-term trends at the REIT and not necessarily macro-level shifts in the senior living industry.

“SNH has been more focused on the private pay side, so they’ve been trying to exit their skilled nursing facilities for the longest time,” Carroll told SNN.

In addition, the company’s focus on the rehab-to-home model in its CCRCs may also have contributed to the issues on the skilled side, as the shift to the Comprehensive Care for Joint Replacement (CJR) model limited revenues from formerly bread-and-butter hip and joint residents.

“I think they saw more pressure within those units specifically,” Carroll said.

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