Sunrise Senior Living Will Receive $80M from Contract Buyouts

MCLEAN, VA-The cancellation of 12 long-term management contracts will leave Sunrise Senior Living with an $80-million payment of buyout fees now that Newton, MA-based Five Star Quality Care Inc. says it will exercise its right to terminate Sunrise's management of the dozen properties. The option to cancel the contracts was stipulated as part of Sunrise's 2003 acquisition of Marriott Senior Living Services. That purchase transferred 30 management contracts from Marriott to Sunrise.

Sunrise's release on the impending transaction notes that, "Five Star's right to terminate these contracts is not related to Sunrise's performance at any of these communities." According to Sunrise's second quarter 2005 earnings report, "revenues under management increased 10% to $482.2 million in the second quarter of 2005 from $436.7 million in the second quarter of 2004." Those revenues included properties owned by third parties such as Five Star, as well as Sunrise's consolidated communities and co-owned communities.

In its 2004 annual report issued in March 2005, Five Star reported that "Sunrise's management of 30 of our communities may have adverse consequences to us." In March 2003, Marriott sold its subsidiary which managed 30 communities for Five Star to Sunrise. "We believe Sunrise's financial condition and reputation as an operator of senior living communities is weaker than the financial condition and reputation of Marriott. The operations and the financial results which we realize from the communities managed for us by Sunrise have declined and become more volatile since this sale and this decline and volatility may continue in the future."

As of late, however, Five Star has expressed an opinion that differs from its assessment noted in the 2004 annual report; one that supports Sunrise's assertion that the contract cancellations have no reflection on its operation of the properties, which Five Star leases from property owner Senior Housing Properties Trust. "The decision to terminate the 12 contracts is more of a decision on Five Star's part as a stronger company over the past few years," Five Star manager of investor relations Timothy A. Bonang tells GlobeSt.com. "We have assigned people who monitor operations at Sunrise communities and have made some suggestions, some of which Sunrise have taken, and there certainly has been some improvement. We've reiterated that in recent reports. Essentially, these are beautiful communities and we would like the opportunity to operate them ourselves."

Sunrise will continue to operate the remaining 18 senior communities. Bonang would not speculate on whether Five Star will takeover management of the 18 properties in the future; he says the company just wants to focus on making a smooth transition with the 12 properties it will soon manage.

Sunrise will apply proceeds from the dissolution of the contracts toward investment activities that could include the procurement of new management contracts and/or other senior housing operators, development of new properties, reduction of existing debt, repurchasing of shares and additional unspecified investments. Five Star did not respond by deadline to a request for additional comment.