Brookdale Senior Living Inc. recently revealed that it had entered into definitive agreements with lessor and joint venture partner, Welltower Inc. The parties have agreed to early termination of Brookdale’s triple-net lease obligations on 37 communities (4,095 units) effective June 30, 2018, and Brookdale has agreed to sell its 20% equity interest in its existing RIDEA joint venture with Welltower.
In addition, according to a prepared statement, Brookdale has elected not to renew two master leases with Welltower scheduled to mature on September 30, 2018 (11 communities; 1,128 units). After conclusion of the transactions, Brookdale will continue to operate 74 communities (3,688 units) under triple-net leases with Welltower.
Lucinda Baier, Brookdale’s President and CEO, said, “We are excited to announce a second significant lease restructuring this year. We have now entered into mutually-beneficial transactions with three of our largest REIT partners, which have restructured our leased portfolios and will provide us with improved strategic flexibility. The transactions with Welltower will improve our ongoing cash flows and overall lease coverage, reduce our lease exposure, streamline our portfolio, provide us with greater transactional flexibility, and offer long-term stability for the remaining portfolio. We are grateful to Tom DeRosa and the Welltower team for their creativeness and focus on completing this win-win transaction, which strengthens our long-term relationship with Welltower and is another important step in our turnaround strategy.”
The transactions include:
- Lease Terminations – Brookdale and Welltower have agreed to early termination of Brookdale’s triple-net lease obligations on 37 communities effective June 30, 2018. The two lease portfolios, which had current and projected negative cash flows, were due to mature in 2028 (27 communities; 3,175 units) and 2020 (10 communities; 920 units). Brookdale has agreed to pay Welltower an aggregate lease termination fee of approximately $58 million and will continue to operate the communities until the communities are transitioned to new operators.
- Future Lease Terminations – The parties separately agreed to allow Brookdale to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5 million upon Welltower’s sale of such communities, with Brookdale to receive a corresponding 6.25% rent credit on Welltower’s disposition proceeds.
- RIDEA Restructuring – Brookdale has agreed to sell its 20% equity interest in its existing Welltower RIDEA joint venture to Welltower, effective June 30, 2018, for net proceeds of approximately $35 million. Brookdale currently provides management services to the 15 joint venture communities (1,970 units), and will continue to manage the communities until the communities are transitioned by Welltower to new managers.
Brookdale has also elected not to renew two master leases with Welltower scheduled to mature on September 30, 2018. Following completion of the foregoing transactions, Brookdale’s remaining lease agreements with Welltower will contain an objective change of control standard, which would allow Brookdale to engage in certain change of control and other transactions without the need to obtain Welltower’s consent, subject to the satisfaction of certain conditions.
Combined, these transactions are expected to reduce Welltower’s Brookdale concentration, on a pro forma basis, from 7.6% of In-Place NOI to approximately 2.9% while also providing pro forma lease coverage of 1.31x on EBITDAR and 1.51x on EBITDARM basis. Brookdale will continue to be responsible for all CapEx and there will be no change in escalator or rent. Please see the accompanying exhibit for a reconciliation of In-Place NOI. Pro forma underwriting is based on operator provided financial information.
“This collaborative transaction is a positive for both Brookdale and Welltower, and demonstrates our ability to strategically reposition our portfolio and is further demonstration of CEO Cindy Baier’s commitment to drive Brookdale to be an action oriented and results focused operator,” said Tom DeRosa, Chief Executive Officer of Welltower. “We are excited to be forming a new operating relationship with Pegasus Senior Living, a new seniors housing business founded by industry veterans Steven Vick and Chris Hollister. Steven and Chris have a combined 50 years of seniors housing operating experience and have partnered with Welltower for over 25 years. Furthermore, we are excited to expand our partnership with Cogir, a premier Canadian operator that we are pleased to see enter the US marketplace with their innovative approach to senior care. Cogir’s CEO, Mathieu Duguay, and his team represent the next generation of seniors housing leadership and we are excited to expand our relationship through the Brookdale restructuring. Welltower is uniquely positioned to facilitate a transition of this scale with minimal disruption to our income stream because of the quality of our Brookdale real estate and deep bench of operators and relationships. We believe there is significant upside to the portfolio that our shareholders will enjoy for years to come.”
Pegasus Senior Living, which will be headquartered in Dallas, TX, will serve as the operator of 37 former Brookdale communities. Pegasus’ principals, Steven Vick and Chris Hollister, have more than 50 years of combined experience in the senior housing space, particularly in operating turn around communities located in secondary markets. “Chris Hollister and I have been friends and senior living colleagues for over 25 years,” said Steven Vick, CEO and Chairman of Pegasus Senior Living. “Each of us have had longstanding mutually beneficial relationships with Welltower with a proven record of success and value creation and we have joined forces to make Pegasus Senior Living a leading senior living management platform. We value and welcome the talented employees at these Brookdale communities and look forward to working with them to enhance the lives of the residents we serve and make a difference every day. We are grateful to Welltower for the confidence and trust they have placed in us. We look forward to building on our 25-year relationship to make Pegasus a high quality and valuable senior living care and service platform.”
Cogir, which is headquartered in Montreal and an existing partner of Welltower, will serve as the new operator and joint venture partner of 12 former Brookdale communities. Cogir has operated more than 50 communities achieving a 96% average occupancy over the last 15 years by leveraging the unparalleled use of technology and modern design aesthetics throughout its communities while focusing on providing high-end services for seniors in Canada. “Coming from North America’s highest market attraction ratio where 1 out of 5 seniors enjoy living in similar communities, we are enthusiastic about creating an extraordinary customer experience with our colleagues by quickly implementing next generation initiatives. With the support of Welltower’s best in class platform, we anticipate becoming an industry leading senior’s housing lifestyle provider in the US market.” said Mathieu Duguay, Cogir’s CEO.