Brookdale, Welltower to part ways on 63 communities

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Thomas DeRosa
Thomas DeRosa

Brookdale Senior Living and real estate investment trust Welltower announced lease restructuring plans Wednesday that will result in 63 senior living communities transitioning to different operators.

Brentwood, TN-based Brookdale's lease obligations for 37 of the communities will be terminated effective June 30, the country's largest senior living community operator said. Toledo, OH-based Welltower said those communities will be managed by a newly formed management group, Pegasus Senior Living.

Pegasus, which will be headquartered in Dallas, will be led by Steven Vick and Chris Hollister.

During Vick's 27-year career in senior living, he co-founded Sterling House; was chief operating officer at Alterra Healthcare Corp., formed by a merger of Sterling House and Alternative Living Services; was CEO of Assisted Living Concepts; and founded Signature Senior Living.

Hollister began his career in senior living in the 1980s. He co-founded and was CEO of Southern Assisted Living, which became part of Brookdale in 2006, and was one of two outside directors of Sunrise Senior Living.

The 37 communities, which have a total of 4,095 units, are part of two lease portfolios. Brookdale said they had current and projected negative cash flows and were due to mature in 2020 or 2028. The company said it has agreed to pay Welltower a lease termination fee of approximately $58 million and will continue to operate the communities until they are transitioned to the new operator.

RIDEA joint venture, master leases

Additionally, Brookdale said it will sell its 20% equity interest in its existing RIDEA joint venture with Welltower for net proceeds of approximately $35 million. Welltower said it will acquire the interest for $74.2 million gross.

Brookdale said it provides management services to the 15 communities that are part of the joint venture, which have a total of 1,970 units. The company will continue to manage them until Welltower transitions them to new managers.

The company also has chosen not to renew two master leases with Welltower that are scheduled to mature on Sept. 30. The master leases involve 11 communities with a total of 1,128 units.

Fate of other properties

Outside of the 37 communities to be managed by Pegasus, Welltower said that 12 of the 63 total properties affected by the restructuring will be managed by Cogir Management Corp. of Canada, an existing partner of Welltower; 11 properties will be allocated among six existing Welltower operators; and the remaining three properties, located in tertiary markets, will be sold.

Brookdale said that when all of the transactions are complete, it will continue to operate 74 communities (3,688 units) under triple-net leases with Welltower.

Positive for both

Welltower CEO Tom DeRosa said the news is positive for both the REIT and Brookdale “and is further demonstration of [Brookdale] CEO Cindy Baier's commitment to drive Brookdale to be an action-oriented and results-focused operator.”

“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,” he added. “We believe there is significant upside to the portfolio that our shareholders will enjoy for years to come.”

The REIT said it expects to lose $5 million in income in the first year of the restructured leases due to the transition but expects to recoup that amount and grow by the third year. Combined, the transactions are expected to reduce Welltower's Brookdale concentration, on a pro forma basis, from 7.6% of net operating income to approximately 2.9%.

Baier said the lease restructuring “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,” she added.

Three REIT partners

Baier noted that Brookdale now has restructured its leased portfolios with three of its largest REIT partners.

In April, Ventas announced that it would combine the leases for all of the 128 Brookdale communities it owns into one master lease and extend the lease for eight years. Under the terms of the agreement, Ventas will provide approximately $48 million in rent credits over eight years and could sell up to 15% of the properties to diversify and improve the quality of its portfolio or reduce leased assets.

HCP first announced in November the plan to reduce the exposure to Brookdale in its portfolio. That plan included selling six communities to Brookdale and terminating management agreements or leases on 68 other properties, among other actions.

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