Five Star Buys Back 10 Management Agreements for $90M

NEWTON, MA-Locally based Five Star Quality Care has notified Sunrise Senior Living Services that it is terminating management agreements for 10 of the 17 senior communities Sunrise operates for Five Star. The termination payments are approximately $90 million, and the cancellation goes into effect 120 days from the April 6 date of notification.

The properties aggregate 2,516 living units in five states. Three each are in Texas and Delaware, two are in Arizona, and one each is located in Indiana and Florida. Five Star, which paid McLean, VA-based Sunrise $8 million in fees for these properties during 2005, will now manage them.

Evrett Benton, Five Star's president and CEO, tells GlobeSt.com, "it makes good economic sense. By several measures, we are the fifth largest operator of senior living facilities. We have contracts that allowed us to terminate the agreements. We have the capabilities for managing the properties, and we won't have to pay the management fees." Of Sunrise, which is the largest operator in this field, Benton says, "It's a very good company."

Five Star is funding the termination payments with cash on hand and proceeds from its recently completed offering of 11.5 million shares of common stock, which included 1.5 million shares of an over-allotment option. In an SEC filing pertaining to the offering, Five Star referred to the anticipated termination of agreements for six properties operated by Sunrise for an aggregate cost of $57.1 million. In the filing, Five Star said that under Sunrise's management, results of the 17 communities "have historically been volatile and unpredictable. Furthermore, over the past six months, the income we realized from these communities has also declined."

The increase to 10 terminations, Benton says, "is because the offering went so well. We raised $70 million, enough to allow us to add four more properties." Of the comments in the filing regarding Sunrise's management, he says, "performance was volatile. There could be a morale problem at the properties."

In a press release, Sunrise refers to Five Star's contractual rights to cancel and says those rights "are not related to Sunrise's performance at any of these communities." It will cease management of them on or about Aug. 4. The Sunrise statement also says, "Sunrise and Five Star have begun discussions regarding these seven management contracts," referring to the communities it still operates for Five Star. Benton declined to discuss plans for the seven properties, saying he'd leave that to the Sunrise statement. A call to Sunrise was not returned by deadline.