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Brookdale Senior Living (BKD), HCP (HCP) Enter Multibillion-Dollar CCRC Joint Ventre

April 23, 2014 5:24 PM EDT

Brookdale Senior Living (NYSE: BKD) and HCP (NYSE: HCP) announced an agreement to enhance and solidify their long-term relationship by creating a new strategic joint venture that will own and operate entry fee continuing care retirement communities (“CCRCs”). At inception, the joint venture will own 14 CCRC campuses valued at $1.2 billion, with Brookdale continuing to manage these communities. In addition, the Companies have agreed to amend leases on 202 HCP-owned senior housing communities currently operated by Emeritus Corporation (NYSE: ESC). The closing of these transactions is conditioned upon the closing of the pending merger between Brookdale and Emeritus.

Andy Smith, Brookdale’s Chief Executive Officer, said, “We are very excited about strengthening our relationship with HCP as we partner to create an industry leading entry fee CCRC joint venture. Combining the capital strengths of HCP with Brookdale’s operating platform forms a compelling investment vehicle for our existing entry fee CCRCs and provides for growth in this fragmented asset class. The modifications to the Emeritus leases should improve upon the previously-announced projected benefits of our pending merger. They bring forward the future value of the imbedded purchase options through lower rent and escalators and reduced lease leverage in a 153-community triple-net portfolio, while creating a 49-community RIDEA joint venture. In addition to improving the economics of our transformational merger with Emeritus, this transaction adheres to our long-term strategy of delivering the best, high-quality solutions for the growing population of seniors and their families.”

“We are proud to expand our strategic relationship with Brookdale, which upon the completion of the Emeritus merger will become the nation’s largest senior living operator,” said Lauralee Martin, President and CEO of HCP. “We are pleased to partner with Brookdale and create the largest CCRC platform in the healthcare REIT sector providing attractive future growth opportunities. The announcement today also allows us to fully retain the real estate value on a portfolio of 52 properties, by eliminating the reinvestment risk related to all existing Emeritus and Brookdale purchase options with HCP. It also reinforces our investment philosophy of creating significant value for our operating partners through real estate driven transactions while providing our shareholders with attractive risk adjusted returns.”

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BROOKDALE AND HCP EXPAND RELATIONSHIP TO FORM A NEW CCRC JOINT VENTURE

The Companies have agreed to create a new strategic joint venture (“CCRC JV”) to own and operate entry fee CCRCs. The CCRC JV will initially be seeded with a 14-campus portfolio valued at $1.2 billion before in-place refundable entry fee obligations. Primarily located in Florida, the portfolio encompasses approximately 7,000 units across a diversified care mix of 67% independent living, 18% skilled nursing, 11% assisted living and 4% memory care. Brookdale and HCP will own 51% and 49%, respectively, of the CCRC JV based on each company’s respective contributions at closing:

Brookdale will contribute eight of its owned campuses, as well as its leasehold rights including purchase options on three HCP-owned properties (comprising two campuses).

HCP will contribute those three properties leased to Brookdale and $334 million of cash, which will be used to acquire from third parties four additional entry fee CCRCs currently managed by Brookdale.

Brookdale has a successful operating history with the CCRC portfolio, having managed a number of these communities for many years, and will continue to manage all properties post closing under a long-term management agreement.

EXCHANGE OF EMERITUS’ PURCHASE OPTIONS AND RELATED LEASE AMENDMENT

As part of this transaction, all existing Emeritus purchase options encompassing 49 HCP properties will be cancelled at closing; in exchange, all triple-net leases between HCP and Emeritus covering 202 senior housing properties will be amended contemporaneously, resulting in two portfolios:

RIDEA Portfolio: 49 non-stabilized properties (of which 19 will relate to cancelled purchase options) will be converted to a RIDEA structure and contributed to a joint venture (“RIDEA JV”), with Brookdale managing the communities and acquiring a 20% ownership in the venture to create an alignment of interests. This pool of unencumbered properties was selected for its attractive future growth profile. The Companies have jointly developed strategic plans for these communities and, upon the closing of Brookdale’s merger with Emeritus, will immediately begin investing significant capital improvements intended to increase occupancy and operating performance of the portfolio.

NNN–leased Portfolio: Brookdale will enter into amended triple-net, master leases for the remaining 153 properties (of which 30 will relate to cancelled purchase options) all guaranteed by the credit of Brookdale Senior Living. The leases will have an average initial term of 15 years, plus two 10-year extension options. The leases provide total base rent in 2014 of $158 million, unchanged from the existing rent, but contain reduced future rent payments and escalations compared to those currently in-place. HCP will make available up to $100 million in capital improvements through 2017 to upgrade the portfolio, earning additional rent at a market yield as funding occurs.

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The operating performance during 2013 for each of the two portfolios is summarized as follows:

Portfolio

Properties Units % Located
in Top 100
MSAs
Occupancy Monthly
Rate/Unit
NOI
Margin

RIDEA JV

49 5,400 78% 80% $4,978 23%

NNN-leased

153 12,800 63% 91% $4,019 32%

202 18,200

ADDITIONAL INFORMATION

All transactions described herein are contingent upon the closing of Brookdale’s pending merger with Emeritus, anticipated to occur in the third quarter of 2014, and are subject to customary closing conditions including regulatory approvals and lender consents. There can be no assurance that the transactions will close or, if they do, when the closing will occur.

Brookdale and HCP have posted supplemental information relating to the transactions on the Investor Relations section of each company’s website – www.brookdale.com and www.hcpi.com. This information will also be furnished by each company in a Form 8-K to be filed with the SEC. The contents of each of the Brookdale and HCP websites (including the presentations referred to herein) are not, and shall not be deemed to be, part of this press release or any other report or document that either Brookdale or HCP files with the SEC.



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