When the investors start fighting about senior living communities, it is NEVER EVER EVER good for the communities, residents and team members.

By Steve Moran

My college degree is in finance but I confess to being mostly bored by finance except as a vehicle to operate successful senior living communities that serve residents, team members, their marketplace communities and society in general.  

I am so far removed from the high flying complex intricacies of stock ownership, governing boards and proxy fights that I am scared to death I will get the details and implications wrong. I am mostly content to let Steve Monroe and the folks at Senior Housing News tackle the financial stuff, because their more interested in it than I am and, therefore, better at it.

Further, like Brookdale, I have a relationship with the leadership at Five Star. They have been open and friendly and accommodating. I like them and articles like this are tough to write.

But . . . here is the thing . . . when the investors start fighting about senior living communities it is NEVER EVER EVER good for the communities, residents and team members.

Further, Brookdale has been a significant blogging target because they are the biggest and there are clear links between their earnings challenges and operations. But over the last few months, Five Star has become this big hairball of two competing tender offers.

The Crux of the Issue – Written early the week of November 7, 2016

It looks like this:

  • Five Star currently has around 275 communities that serve about 31,000 residents in 32 states.   

  • Around 210 communities are owned or leased by Five Star and around 60 are managed for others.

  • The best article I have found on this battle is at Seeking Alpha.

  • There are significant interconnections between Five Star and the Portnoy family, which controls the REIT, “Senior Housing Properties Trust”.  

  • The relationship between the Portnoy family, Five Star and Senior Housing Properties Trust seem to be particularly beneficial to the Portnoy family. At least some minority shareholders see that relationship as being detrimental to their interest.  

  • Prior to the tender offer the Portnoy family controlled somewhere between 1 and 2 percent of the outstanding shares. In addition, Senior Housing Trust owns around 9% of the shares. And they want more.

  • Through an affiliated/related company, the Portnoy family has extended a tender offer to purchase up to 18 million additional shares (about 36%) for $3.00 per share. The tender offer was to end on November 10, 2016 at midnight. (More on this below.)

  • The price at the end of the day on November 11, 2016 was $2.60.

  • Senior Star, a senior living company out of Tulsa, owns about 6.8% of the outstanding Five Star shares.

  • They have been putting pressure on Five Star management to “do something” about the poor performance of the Five Star stock. Part of that pressure included an offer to purchase the 30 or so senior living communities that Five Star owns (as opposed to leases or manages). When that offer was rejected, it was followed with two open letters to shareholders.

  • According to public statements by Senior Star, they believe much of the poor occupancy at Five Star is related to not having adequate capital to modernize their communities. Their goal in all of this was to help with or push Five Star leadership into figuring out how to fix this problem.

  • Most recently they indicated a desire to purchase up to 10,000,000 additional shares at a price of $3.45 per share. In order for this to take place they needed some restriction waivers from the board and from Senior Housing Properties Trust. The board refused that request.

  • The final effort was to push to get a new “independent” board member who would better represent independent shareholders.

It turns out that it is a fair amount more complex than this but I think this is a pretty good overview as of today, but I am quite sure it is not over. My read between the lines is that we could see litigation to allow the rejected tender offer based on the idea that the enmeshed relationships are not good for the those shareholders who are outside the fold.

Friday November 11, 2016

The tender offer expired at midnight on Thursday, November 10 and on the 11th, it was announced that 22 million shares were tendered or 4 million more than what the tender offer was for. This means the 18 million will be purchased on a pro rata basis and 4 million returned to shareholders.

What this means is that Five Star Management and the Portnoy family have solidified their control of the company. Senior Star at this point seems to have three choices:

  1. They can continue to hold their Five Star stock as an investment hoping for an improvement in price.

  2. They could file suit against the board alleging unfair business practices (probably the wrong term).

  3. They can sell their stock and move on.

Based on the various folks I have talked to, number two sounds like a long shot with almost no upside for anyone except attorneys. So I am guessing we will see 1 or 3 happen.  

Is This Good for Shareholders?

It is hard to know for sure, except that the holders of the 22 million shares would seem to be saying they don’t see any near- or medium-term upside.

Is is Good for Management?

It would seem so in that they have solidified control of the company.

Is it Good for Residents, Family Members and Team Members?

This is a bit harder to address. I want to start by saying that because it seems as if the matter is settled (though I don’t say this with 100% certainty), it removes the distraction of this tussle.  

It may be that, in fact, this has not really had any impact on operations but I worry . . . Five Star represents a lot of senior living communities, a lot of residents, a lot of team members and families. Here is why I hate these things:

  • It continues to baffle me that these large enterprise senior living companies can’t beat the market, though I would note that Capital Senior Living is close to the market.

  • These kinds of fights make it really really hard for management to focus on the really important stuff, which right now for Five Star, is improving occupancy.  

  • In doing research for this article I have poured through many dozens of pages of websites and filings on what is going on with Five Star. I have not seen a single thing that would suggest anyone is thinking about the impact to residents, team members and families. This should be shocking.

    Perhaps worse, I did see one statement that suggested the path to success for Five Star was a new capital structure. REALLY? How about doing what it takes to get occupancy to 90% or 95% or 99%. I am pretty sure the stock price would be a lot higher if the occupancy were 95% and that the gains in share price from that would make the value improvements from changes in capital structure look like pocket lint.

  • Fights like this destabilize leadership at least down to the executive director level.   

When I spend time thinking about and writing about battles like this, I find myself wondering if public ownership and quality senior living are compatible. And yet, I think quality care equals high occupancy and high occupancy equals high profits and high profits equal high share prices.

Which brings me back to this one question:  WHY DO THE BIG PUBLICLY TRADED COMPANIES STRUGGLE TO EVEN BE AT INDUSTRY AVERAGE OCCUPANCY LEVELS?

I think it is fundamental that they do not have contrarians who understand the industry and the marketplace who are willing to ask really difficult questions and know that they will be celebrated and not castigated for asking those questions.

Maybe Five Star should scoop me up as a board member before Brookdale does . . .

Naw, I am not holding my breathe for either one, but they should.