Andy Smith of Brookdale, left, and Thomas Herzog of HCP.

HCP will reduce the exposure to Brookdale Senior Living in its portfolio and Brookdale will gain more flexibility to negotiate to sell some or all of its assets in a series of transactions announced Thursday that the CEOs of both companies are calling a “win-win.”

The  Irvine, CA-based real estate investment trust will sell six communities to Brookdale and terminate management agreements or leases on 68 other properties, among other actions.

The deals, expected to be finalized this year and next, also will help the REIT diversify its portfolio and improve its balance sheet and credit profile, HCP said.

Brookdale President and CEO Andy Smith said the transactions will “simplify and streamline our portfolio, reduce lease liability, increase ownership of our communities and build long-term, durable cash flow.”

The agreements also will give the country’s largest senior living operator, headquartered in Brentwood, TN, more flexibility as it continues to negotiate to sell some or all of its remaining assets, Smith suggested.

“This announcement is a byproduct of both our ongoing strategic review process and our portfolio optimization initiative,” Smith said. “We continue to explore actively the full range of options and alternatives to simplify our business, optimize our portfolio and create and enhance shareholder value.”

HCP President and CEO Thomas Herzog said the agreement was reached in a collaborative process.

“Reducing our Brookdale concentration has been one of our highest priorities in 2017, and these agreements allow us to do that in a structured and cooperative manner,” he added.

Indeed, in an August earnings call, HCP leaders said Brookdale properties negatively affected the performance of its senior housing operating portfolio in the second quarter due to a higher-than-expected decline in occupancy, under-spending on marketing and sales, above-average turnover of sales directors and distractions caused by discussions about its future. At the time, the company said it hoped to reduce its exposure to Brookdale to 20% or less. The REIT said Monday that once the newly announced transactions are finalized, its Brookdale concentration should be about 15.7% on a pro forma basis, compared with the current 27%.

As of August, Herzog said on the second-quarter earnings call, HCP had sold or transferred 67 Brookdale properties and a 40% interest in RIDEA II in the previous 12 months.

The transactions announced Monday:

  • HCP will sell to Brookdale six properties for $275 million plus transaction costs. Brookdale said most of the properties “have historically performed well.”
  • The REIT will buy Brookdale’s 10% equity ownership in two RIDEA joint ventures with HCP for $99 million; Brookdale said it will use the proceeds to help buy the aforementioned six properties. Brookdale said it provides management services for 59 affected communities in the RIDEA I and III joint ventures, which have a total of 9,585 units. The company said it will continue to manage 18 of the communities (3,276 units) with an extension of the term to 2030 and will acquire four of the communities (787 units). It no longer will manage the other 37 communities (5,522 units).
  • The management agreements for 36 senior housing operating properties and the leases on 32 triple-net communities will be terminated; Brookdale said that many of the latter properties “have underperformed or are underwater.” HCP said it plans to sell or transfer to other operators the 68 properties in 2018 for a net total of $600 million to $900 million. Brookdale, which put the number of triple-net properties at 34, said it will be buying two of them. Regarding the properties that HCP will sell or transfer, “We’ve identified a handful of operators that we would transition the properties to,” Kendall Young, HCP senior managing director, said Thursday on a third-quarter earnings call. “All of them are known to us, and most of them are current operators for HCP. We do want to limit the number of operators that we do transition assets to, to minimize that transition risk.”
  • The REIT will provide a $5 million annual rent reduction to Brookdale for the triple-net properties that remain, effective Jan. 1. Brookdale said the new master lease, effective Nov. 1, gives the company more control over future transactions since they won’t require HCP’s approval.
  • HCP will sell its remaining investments in the RIDEA II senior housing joint venture for $332 million to an investor group led by Columbia Pacific Advisors. The joint venture owns 49 communities, 46 of which are managed by Brookdale.

HCP also received the right to end management agreements on 20 senior housing operating portfolio properties managed by Brookdale.

The REIT discussed the news Thursday in its third-quarter earnings call. Brookdale has scheduled its third-quarter earnings call for Tuesday at 9 a.m. ET.