Tom Herzog and Cindy Baier

Brookdale Senior Living and real estate investment trust HCP Inc. on Tuesday touted the collaboration that led to $1 billion in “mutually beneficial” transactions that will alter the relationship between the two senior living giants.

Brookdale President and CEO Lucinda “Cindy” Baier said the deals will “enhance shareholder value,” among other benefits, and HCP President and CEO Tom Herzog said they will help the REIT “improve its operator diversification, as well as strengthen its remaining Brookdale triple-net portfolio.”

The first agreements involve the parties’ joint venture, consisting of 15 continuing care retirement communities. Under the transactions, Irvine, CA-based HCP will acquire Brentwood, TN-based Brookdale’s 51% joint venture interest in 12 entry-fee CCRCs for $510 million, which will increase the REIT’s ownership interest to 100%. Life Care Services will take over management of the CCRCs.

HCP will pay Brookdale a $100 million management termination fee, which the REIT said equals approximately five times the annual management fee.

The two parties also agreed to sell three other CCRCs.

Acquisition of the interest, the transition of management of the CCRCs to LCS, and the CCRC sales are expected to close in the first quarter of next year, HCP said.

Additionally, Brookdale and HCP agreed to restructure a portfolio of 43 triple-net leased senior living communities. Brookdale will acquire 18 of the communities for $405 million, one property will be transitioned to a third party, and the leases for the remaining 24 communities will be amended and restated.

“This agreement with HCP marks another significant step in Brookdale’s ongoing efforts to increase our owned real estate portfolio, reduce complexity of our operations and, most importantly, unlock the value of the unconsolidated CCRC venture,” Baier said in a statement. “These transactions highlight the importance of maintaining collaborative relationships with our REIT partners as we continually evaluate opportunities to enhance shareholder value. We appreciate the partnership with Tom Herzog and his team in achieving both companies’ objectives.”

When the final CCRC sale is complete, Brookdale will have eliminated almost all of its unconsolidated venture interests, which the company said will simplify financial reporting. 

The company expects $277 million in net cash proceeds from HCP’s acqusition of its 51% interest in the 12 CCRCs as well as 51% of the net cash proceeds from the sale of the three other CCRCs. Brookdale said it is considering using a portion of net proceeds to repurchase shares and pay down debt.

HCP said it will save $7 million annually by resetting the management contract with LCS for the 12 CCRCs. The REIT also expects to see a 7% initial return on capital invested as part of the restructured triple-net leases, which call for HCP to provide up to $35 million in capital investment over five years.

The moves continue HCP’s efforts to reduce the concentration of Brookdale properties in its portfolio, which in 2016 accounted for 35% the REIT’s net operating income, Herzog said on a previous earnings call. Through these latest transactions, the concentration of Brookdale properties in HCP’s portfolio will be decreased from 16% cash NOI to 8%.

“We are pleased with the outcome of this mutually beneficial transaction, which reflects the collaboration and partnership we share with Brookdale,” Herzog said. “This transaction will allow HCP to improve its operator diversification, as well as strengthen its remaining Brookdale triple-net portfolio.”

Both Brookdale and HCP have posted presentations about the transactions on their websites.

Brookdale is the country’s largest senior living operator and third largest owner of senior living properties, according to 2019 ASHA 50. The company also tops the 2019 Argentum list of largest providers

HCP is the sixth largest owner of senior living properties, according to the American Seniors Housing Association list.

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