NEWTON, Mass. — Five Star Senior Living Inc. (NASDAQ: FVE) has unveiled a new strategic plan to reposition its senior living management business to focus on larger independent living, assisted living and memory care communities, as well as standalone active adult and independent living communities.
As part of the implementation of this new plan, Five Star is amending its management arrangements with Diversified Healthcare Trust (NASDAQ: DHC) to allow for the transition of 108 smaller senior living communities with approximately 7,500 living units, which Five Star currently manages for DHC, to other operators.
Five Star will also close and reposition the skilled nursing units in all continuing care retirement communities (CCRCs) that Five Star will continue to manage for DHC, which includes approximately 1,500 living units. The transition of management to other operators as well as the closing and repositioning of the skilled nursing units in the CCRCs is scheduled for completion before the end of the year.
Five Star will continue to operate 144 senior living communities with approximately 20,200 living units. This includes managing 120 senior living communities with approximately 17,900 living units for DHC, as well as operating its existing owned and leased portfolio of 24 communities with approximately 2,300 living units. Five Star plans to also continue to grow its rehabilitation and wellness services business.
“The implementation of Five Star’s new strategic plan allows us to build on our operational strengths at larger senior living communities and standalone active adult and independent living communities while continuing to evolve our choice-based, financially flexible rehabilitation and wellness services offerings to meet the changing needs and preferences of older adults,” says Katherine Potter, president and CEO of Five Star.
“We believe that this shift in our focus is critical to the future success of Five Star and better positions us to expand our senior living management business and continue to diversify revenue sources in the future. More specifically, the implementation of this new strategic plan will showcase the operational strengths of Five Star to current and potential partners and customers in the future.”
The portfolio Five Star will continue to manage for DHC represents 66 percent of the existing managed portfolio units and approximately 60 percent of Five Star’s management fee revenues for 2020. This retained portfolio of 120 communities managed for DHC outperformed the total DHC managed portfolio with 110 basis points higher average occupancy and 280 basis points higher EBITDA margin.
The communities to be transitioned represent approximately 40 percent of Five Star’s management fee revenues from DHC, but less than 12 percent of Five Star’s total management and operating revenues for 2020. Five Star expects to partially offset the resulting revenue loss with expense reductions to right-size operations.
Five Star expects to incur net non-recurring restructuring costs of up to $5.5 million in connection with implementing this new strategic plan.
In connection with this new strategic plan, Five Star and DHC have also agreed to make certain additional changes to their management arrangements, including extending the term to Dec. 31, 2036; eliminating DHC’s right to sell communities without payment to Five Star of a termination fee; eliminating the cap on Five Star’s incentive fee; and modifying DHC’s rights to terminate for performance.
“The changes in the management arrangements with Five Star are being made to improve the operating performance of DHC’s seniors housing operating portfolio (SHOP) business in the future,” says Jennifer Francis, president and chief operating officer of DHC). “More specifically, we believe the transition of management of our 108 smaller communities to a diverse group of best-in-class operators will enhance their performance and we have already initiated discussions with many potential new operators.”
Based in Newton, Five Star was the fourth largest seniors housing operator in the United States, according to data compiled as of June 1, 2020, by the American Seniors Housing Association (ASHA).
The post Five Star Restructures Management Agreements with DHC, Plans to Exit Skilled Nursing Sector appeared first on Seniors Housing Business.