Brookdale Senior Living (BKD) to Acquire Minority Stake in HCP, Blackstone Acquisition Portfolio

November 1, 2016 6:04 AM EDT

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Brookdale Senior Living Inc. (NYSE: BKD) announced that it has entered into a definitive agreement with affiliates of Blackstone Real Estate Partners VIII L.P. (collectively "Blackstone") to acquire a 15% ownership interest in a joint venture that intends to acquire a portfolio of 64 communities currently leased to Brookdale by HCP, Inc. ("HCP"). Upon completion of the acquisition of the assets, Brookdale will manage the communities on behalf of the joint venture.

Additionally, the Company announced that it has entered into a definitive agreement with HCP for a multi-part transaction involving, among other things, the termination of leases for 29 communities, the contribution of four communities currently leased to Brookdale by HCP into an existing RIDEA joint venture with HCP, and the financing of certain communities owned by the entry fee CCRC Joint Venture between HCP and Brookdale.

Andy Smith, Brookdale's President and CEO, said, "These transactions are meaningful steps in our ongoing portfolio optimization initiative. Through these transactions, we expect that we will improve our return on invested capital, significantly improve our cash flow, reduce lease leverage, and improve the coverage of the remaining HCP leased portfolio. We appreciate the working relationship we have with HCP in bringing these transactions to fruition. We are also extremely pleased to create a relationship with Blackstone, one of the country's largest capital partners, in a structure that better aligns the interests of the owner and operator and provides us with the opportunity to share in value creation as we improve the performance of those communities. We are committed to continuing to pursue other opportunities to optimize our portfolio, simplify our business and create shareholder value."

Blackstone Joint Venture

Pursuant to an agreement between Blackstone and HCP, Blackstone has agreed to purchase the 64 community portfolio (5,967 units) for $1.125 billion subject to the existing leases. Separately, Brookdale and Blackstone have agreed to form a joint venture into which Blackstone will contribute the portfolio at the closing of the purchase from HCP, and into which Brookdale expects to contribute a total of approximately $170 million to purchase a 15% equity interest, terminate the existing lease, and fund its share of anticipated closing costs and working capital. Following closing of the transaction, expected in the first quarter of 2017, Brookdale will manage the communities on behalf of the joint venture.

HCP Lease Termination and Restructuring

Pursuant to the separate, multi-part transaction with HCP, the Company and HCP have agreed to terminate triple-net leases on 33 underperforming communities, including:

  • the termination of leases on 25 communities (2,031 units), which is expected to occur in stages through the fourth quarter of 2017;
  • HCP's contribution of four currently-leased communities (527 units) into one of Brookdale's existing RIDEA joint ventures with HCP, which is expected to close during the fourth quarter of 2016; and
  • the termination of leases on four communities (340 units), which is expected during the fourth quarter of 2016.

In addition, HCP and Brookdale have agreed to place additional non-recourse mortgage financing on assets owned by the parties' existing non-consolidated CCRC joint venture. Upon completion of these financing transactions (which are expected to occur during the fourth quarter of 2016), Brookdale expects to receive distributions of more than $200 million from the joint venture.

Benefits of Transactions

Completion of the transactions outlined above are expected to have several significant benefits for the Company:

  • Blackstone joint venture increases cash flow – With the elimination of the above-market leases on the 64 community portfolio (which have a long-term remaining life) and the related joint venture and management arrangement, Brookdale's annual CFFO less Non-Development CapEx is expected to increase by approximately $33 million in year one.
  • Blackstone joint venture produces attractive return on investment – The combined impact of the elimination of significant rent expense, the new management fees Brookdale will receive, and Brookdale's equity interest in the joint venture are expected to result in an attractive return on the approximately $170 million investment.
  • HCP transaction increases cash flow – With the termination of the leases on the 29 communities and the transition of the four communities into the RIDEA joint venture, Brookdale's CFFO less Non-Development CapEx is expected to increase by approximately $7 million in year one.
  • Both transactions reduce consolidated leverage – Upon completion of the transactions with HCP and Blackstone, Brookdale's leverage ratios are projected to improve by approximately 0.3x.
  • Brookdale retains upside opportunity on 68 communities – Brookdale will retain the opportunity to participate in upside performance on the 64 community joint venture with Blackstone and the four HCP communities transitioned to the RIDEA joint venture, most of which have performed well in the past, and management believes the operating performance of the communities can recover to high operating levels.
  • Improves coverage on remaining HCP triple-net leased portfolio – The lease coverage of the remaining HCP leased portfolio is expected to improve to more than 1.2x after both transactions are completed.

The closings of the various transactions referenced above are subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. There can be no assurance that the transactions will close or, if they do, when the closings will occur.

Note Regarding Non-GAAP Financial Measures: The Company strongly urges you to review the information under "Reconciliation of Non-GAAP Financial Measures" below for the Company's definition of CFFO less Non-Development CapEx and a reconciliation of such measure from the Company's net cash provided by (used in) operating activities. A reconciliation of the expected impact of the transactions to the most comparable GAAP financial measure is not available without unreasonable effort due to the inherent difficulty in forecasting the timing or amounts of items required to reconcile CFFO less Non-Development CapEx from the Company's net cash provided by (used in) operating activities. Variability in the timing or amounts of items required to reconcile each measure may have a significant impact on the Company's future GAAP results.



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